(See Problem 11

question 18

Multiple Choice

(See Problem 11.) Wilfred's expected utility function is , where p is the probability that he consumes c₁ and 1 - p is the probability that he consumes c₂. Wilfred is offered a choice between getting a sure payment of $Z or a lottery in which he receives $2,500 with probability .40 or $6,400 with probability .60. Wilfred will choose the sure payment if

• A) Z > 4,624 and the lottery if Z < 4,624.
• B) Z > 3,562 and the lottery if Z < 3,562.
• C) Z > 5,512 and the lottery if Z < 5,512.
• D) Z > 6,400 and the lottery if Z < 6,400.
• E) Z > 4,840 and the lottery if Z < 4,840.

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Definitions:

Escrow

A legal arrangement in which a third party temporarily holds money, property, or documents until certain conditions are fulfilled.

Real Estate

Property consisting of land or buildings, and the natural resources of the land including uncultivated flora and fauna, farmed crops and livestock, water, and mineral deposits.

Mortgage Debt

The amount of money borrowed to purchase a property, which the borrower is obligated to repay with interest to the lender, typically secured by the property itself.

Equity of Redemption

The right of a borrower to reclaim their property pledged as collateral upon full repayment of the debt prior to foreclosure.