Stan, Who Is Risk Averse, Can Invest in Project a or Project

question 120

Multiple Choice

Stan, who is risk averse, can invest in project A or project B. Project A returns $3,000 with probability 1/2 and $9,000 with probability 1/2. Project B returns nothing with probability 1/2 and $12,000 with probability 1/2. For Stan, project A has

• A) greater expected wealth and greater expected utility than project B.
• B) lower expected wealth and lower expected utility than project B.
• C) the same expected wealth and the same expected utility as project B.
• D) the same expected wealth but higher expected utility than project B.

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Definitions:

Decision-Making Process

A systematic approach involving identification, analysis, and choosing among alternative courses of action to resolve problems or achieve objectives.

Ethical Standards

Guidelines or principles that govern the conduct of individuals and organizations, ensuring behavior is moral and right.

Bounded Rationality

The concept that decision-making is limited by the information available, the cognitive limitations of individuals, and the finite amount of time available to make a decision.

Budget Increase

An upward adjustment in the amount of money allocated for specific purposes, often reflecting growth or expansion in operations or projects.