The Relationship Between Income and Total Utility for Three Investors

question 75

Essay

The relationship between income and total utility for three investors (A, B, and
C) is shown in the tables below.
A B C
Income TU Income TU Income TU
5,000 14 5,000 4 5,000 6
10,000 24 10,000 8 10,000 14
15,000 32 15,000 12 15,000 24
20,000 38 20,000 16 20,000 36
25,000 43 25,000 20 25,000 52
30,000 47 30,000 24 30,000 72
35,000 49 35,000 28 35,000 100
Each investor has been confronted with the following three investment opportunities. The first opportunity is an investment which pays $15,000 risk free. Opportunity two offers a 0.4 probability of a $25,000 payment and a 0.6 probability of paying $10,000. The final investment will either pay $35,000 with a probability of 0.25 or $5,000 with a probability of 0.75. Determine the alternative each of the above investors would choose. Provide an intuitive explanation for the differences in their choices.

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Definitions:

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