Quincy's expected utility function is pc^1/2₁ + (1 - p)c^1/2₂, where p is the probability that he consumes c₁ and 1 - p is the probability that he consumes c₂.Wilbur is offered a choice between getting a sure payment of $Z or a lottery in which he receives $3,600 with probability .60 and $12,100 with probability .40.Wilbur will choose the sure payment if A)Z 6,400 and the lottery if Z 12,100 and the lottery if Z 9,250 and the lottery if Z 5,000 and the lottery if Z 7,000 and the lottery if Z

Question

Quincy's expected utility function is pc^1/2₁ + (1 - p)c^1/2₂, where p is the probability that he consumes c₁ and 1 - p is the probability that he consumes c₂.Wilbur is offered a choice between getting a sure payment of $Z or a lottery in which he receives $3,600 with probability .60 and $12,100 with probability .40.Wilbur will choose the sure payment if A)Z > 6,400 and the lottery if Z <6,400. B)Z > 12,100 and the lottery if Z < 12,100. C)Z > 9,250 and the lottery if Z < 9,250. D)Z > 5,000 and the lottery if Z <5,000. E)Z > 7,000 and the lottery if Z < 7,000.

Quizplus · Accepted Answer

The expected value of the lottery is calculated as (0.60 * $3,600) + (0.40 * $12,100) = $6,400. Wilbur will choose the sure payment if it is greater than the expected value of the lottery ($6,400) and the lottery if the sure payment is less than $6,400.

Quincy's Expected Utility Function Is Pc1/21 + (1 - P)c1/22

Quincy's Expected Utility Function Is Pc^1/2₁ + (1 - P)c^1/2₂