Sally Kink Is an Expected Utility Maximizer with Utility Function

question 11

Multiple Choice

Sally Kink is an expected utility maximizer with utility function pu(c₁) + (1 - p) u(c₂) , where for any x < 8,000, u(x) = 2x, and for x greater than or equal to 8,000, u(x) = 16,000 + x.

• A) Sally will never take a bet if there is a chance that it leaves her with wealth less than $16,000.
• B) Sally will be risk neutral if her income is less than $8,000 and risk averse if her income is more than $8,000.
• C) Sally will be risk averse if her income is less than $8,000 but risk loving if her income is more than $8,000.
• D) For bets that involve no chance of her wealth exceeding $8,000, Sally will take any bet that has a positive expected net payoff.
• E) None of the above.

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Definitions:

Money

A medium of exchange, a unit of account, and a store of value, used to facilitate transactions.

Wealth

An abundance of valuable resources or valuable material possessions, often measured in terms of assets like money, real estate, and personal property.

Bank Holding Company

A corporation that owns banks.

Private Banks

Financial institutions that are owned by private individuals or corporations instead of being owned by the government, offering banking services to individuals and businesses.