Question
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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