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:

Actual Overhead Costs

The real expenses that a company incurs for running its operations, excluding direct labor and materials, instead involving costs like utilities and rent.

Budgeted Overhead

An estimate of the total indirect costs expected during a specific period for the efficient operation of a business.

Volume Overhead Variance

The difference between the budgeted and actual fixed manufacturing overhead costs, attributed to changes in production volume.

Manufacturing Overhead

Any expenses related to the production process that are not direct materials or direct labor costs.