The Assumptions Concerning the Shape of Utility Functions of Investors

question 3

Multiple Choice

The assumptions concerning the shape of utility functions of investors differ between conventional theory and prospect theory. Conventional theory assumes that utility functions are __________, whereas prospect theory assumes that utility functions are __________.

• A) concave and defined in terms of wealth; s-shaped (convex to losses and concave to gains) and defined in terms of losses relative to current wealth
• B) convex and defined in terms of losses relative to current wealth; s-shaped (convex to losses and concave to gains) and defined in terms of losses relative to current wealth
• C) s-shaped (convex to losses and concave to gains) and defined in terms of losses relative to current wealth; concave and defined in terms of wealth
• D) s-shaped (convex to losses and concave to gains) and defined in terms of wealth; concave and defined in terms of losses relative to current wealth
• E) convex and defined in terms of wealth; concave and defined in terms of gains relative to current wealth

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Definitions:

Current Cost Accounting System

An accounting approach that records assets and liabilities at their current market value instead of their historical cost.

Unrealized Holding Gains

Increases in the value of assets that an entity holds but has not yet sold, and thus are not reflected in the income statement until sold.

Absorption Costing

A costing method that includes all manufacturing costs - direct materials, direct labor, and both variable and fixed manufacturing overhead - in the cost of a product.

Production Costs

Expenses directly associated with the manufacturing of goods, including materials, labor, and overhead.