The following table shows the relationship between your wealth (in thousands ofdollars) and your utility:WealthUtility.15.01023.01530.02036.02541.03046.03550.0You can invest in asset A, which offers a riskless payoff of $15,000 or in asset B, whichpays $5,000 with 40% probability and $25,000 with 60% probaility. Which investmentdo you choose?A. B, because its expected utility of 31.6 is greater than the utility of A.O B. A, because it is riskless.OC. A, because its utility is greater than the expected utility of B, which is 28.4.O D. B, because its expected utility of 30.6 is greater than the utility of A.

In economics, the term "utility" describes the overall enjoyment or gain from consuming a good or…

You can invest in asset A, which offers a riskless payoff of $15,000 or in asset B, which pays $5,000 with 40% probability and $25,000 with 60% probability. Which investment do you choose? A. B, because its expected utility of 31.6 is greater than the utility of A. O B. A, because it is riskless. OC. A, because its utility is greater than the expected utility of B, which is 28.4. O D. B, because its expected utility of 30.6 is greater than the utility of A.

You can invest in asset A, which offers a riskless payoff of $15,000 or in asset B, which pays $5,000 with 40% probability and $25,000 with 60% probability. Which investment do you choose? A. B, because its expected utility of 31.6 is greater than the utility of A. O B. A, because it is riskless. OC. A, because its utility is greater than the expected utility of B, which is 28.4. O D. B, because its expected utility of 30.6 is greater than the utility of A.

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter9: The Basic Tools Of Finance

Section: Chapter Questions

Problem 9PA

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Jamal has autility function U=W1/2,where W is his wealth in millions of dollars and U is the utitlity he obtains from that wealth.Inthe final stage of a game show,the host offers offers Jamal a choice(A)$4 million dollar for sure,or (B) a gamble that pays $1 million with probability 0.6 and $9million with probability 0.4. a.Graph Jamal's utitility function.Is he risk averse?Explain. b.Does A or B offers Jamal a higher expected price?Explain your reasoning with appropriate calculations. c.Does A or B offer Jamal a higher expected utility? d.Should Jamal pick A or B? Why?
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Jamal has a utility function U= W1/2 where Wis his wealth in millions of 'dollars and Uis the utility he obtains from that wealth. In the final stage of a game show, the host offers Jamal a choice between (A) $4 million for sure, or (B) a gamble that pays $1million with a probability of 0.6 and $9 million with a probability of 0.4. a. Graph Jamal's utility function. Is he risk-averse? Explain. b. Does A or B offer, Jamal, a higher expected price? Explain your reasoning with appropriate calculations. (Hint: The expected value of a random variable is the weighted average of the possible outcomes, where the probabilities are the weights.) c. Does A or B offer Jamal a higher expected utility? Again, show your calculations. d. Should Jamal pick A or B? Why?
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