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Suppose that a decision maker's utility as a function of her wealth, x , is given by U ( x ) = ln ( x)

Suppose that a decision maker's utility as a function of her wealth,x, is given byU(x) = ln (x) (ln is the natural logarithm ofx).

The decision maker now has $15,000 and two possible decisions. For decision 1, she gains $5,000 for certain. For decision 2, she loses $4,000 with probability 0.2, but gains $7,000 with probability 0.8. Which decision maximizes the expected utility of her net wealth?

a.

She should choose option 2. Her expected utility is 9.93.

b.

She should choose option 1.Her expected utility is 9.90.

c.

She should choose option 2.Her expected utility is 9.85.

d.

She is indifferent between the two choices.

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