A Decision-Maker Is Faced with a Choice Between a Lottery $U = \sqrt { I }$

question 22

Multiple Choice

A decision-maker is faced with a choice between a lottery with a 30% chance of a payoff of $30 and a 70% chance of a payoff of $80, and a guaranteed payoff of $65. If the decision maker's utility function is $U = \sqrt { I }$ what is the risk premium associated with this choice?

• A)$1.59
• B)$2.52
• C)$0
• D)$3.95

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Definitions:

Lifespan Development

The study of how human beings grow and change from infancy through old age, taking into account both biological and environmental influences.

Cultural Expectations

Shared beliefs or norms within a society about how people should behave.

Fundamentally Affected

Deeply or profoundly impacted or changed, often in a way that alters something's or someone's nature or function.

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An individual who formulates and proposes theories based on observations, experiments, and reasoning.