Consider an individual with utility , where is money available. She has Rs 100. She can buy a lottery costing Rs 51 that pays Rs 351 with probability and 0 with probability . is an expected-utility maximizer. She will:
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Consider an individual A with utility u(x)=10√x, where x is money available. She has Rs 100. She can buy a lottery costing Rs 51 that pays Rs 351 with probability p and 0 with probability 1-p. A is an expected-utility maximizer. She will: (A) not prefer to buy the lottery at all as long as p<1 (B) certainly prefer to buy the lottery as long as p>0 (C) prefer to buy the lottery if and only if p>51/351 (D) prefer to buy the lottery if and only if p>51/221
Also written as: Consider an individual A with utility u(x)=10sqrt(x), where x is money available. She has Rs 100. She can buy a lottery costing Rs 51 that pays Rs 351 with probability p and 0 with probability 1-p. A is an expected-utility maximizer. She will:
Choice under uncertainty has come up 27 times in 7 exams since 2007.
This question is on Expected utility and the von Neumann-Morgenstern framework, part of Choice under uncertainty in Microeconomics.
Ranking uncertain prospects by expected utility, and where observed choices depart from it.
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Question from the DSE 2013 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.