Scenario 27-1
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Lisa Has a Utility Function $$U = W ^ { 1 / 2 }$$

question 107

Essay

Scenario 27-1
​
Lisa has a utility function
$$U = W ^ { 1 / 2 }$$ where W is Lisa's wealth in millions of dollars and U is the utility she obtains.
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-Refer to Scenario 27-1. Suppose Lisa is faced with a choice between two options. With option A Lisa receives a guaranteed $9 million. With option B Lisa faces a lottery that pays $4 million with probability 0.4 and pays $16 million with probability 0.6. Given Lisa's utility function, will she prefer option A or option B? Provide evidence to support your answer.

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Definitions:

Variable Budget

Variable Budget is a budget that adjusts based on changes in the volume of activity, allowing expenses to vary in direct proportion to changes in operational levels.

Favorable Variances

Differences between actual and budgeted or standard costs that result in better-than-expected financial performance.

Unfavorable Variances

Differences where actual costs are higher than standard or expected costs in budgeting.

Cost Variance

The difference between the estimated cost of a project or production and the actual cost incurred.