Sally Kink Is an Expected Utility Maximizer with Utility Function

question 12

Multiple Choice

Sally Kink is an expected utility maximizer with utility function pu(c₁) + (1 - p) u(c₂) , where for any x < 6,000, u(x) = 2x, and for x greater than or equal to 6,000, u(x) = 12,000 + x.

• A) Sally will be risk neutral if her income is less than $6,000 and risk averse if her income is more than $6,000.
• B) Sally will be risk averse if her income is less than $6,000 but risk loving if her income is more than $6,000.
• C) For bets that involve no chance of her wealth exceeding $6,000, Sally will take any bet that has a positive expected net payoff.
• D) Sally will never take a bet if there is a chance that it leaves her with wealth less than $12,000.
• E) None of the above.

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Definitions:

Pledging Receivables

Pledging receivables involves using the money owed to a company by its customers as collateral for a loan.

Effective Cost

Effective cost refers to the total cost of a financing option when all charges, fees, and interest payments are taken into account.

Annual Rate

The interest rate for a period of one year, often used to compare the yields of different investment and financing options.

ABC System

A system of controlling inventory that recognizes the differing cost and importance of various items. A parts are expensive and/or important and are controlled carefully. C parts are cheap and plentiful, so little effort is expended to monitor them. B parts are between As and Cs.