Sally Kink Is an Expected Utility Maximizer with Utility Function

question 21

Multiple Choice

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

• A) Sally will be risk averse if her income is less than $1,000 but risk loving if her income is more than $1,000.
• B) Sally will never take a bet if there is a chance that it leaves her with wealth less than $2,000.
• C) Sally will be risk neutral if her income is less than $1,000 and risk averse if her income is more than $1,000.
• D) For bets that involve no chance of her wealth exceeding $1,000, Sally will take any bet that has a positive expected net payoff.
• E) None of the above.

Analyze the impact of probabilities on expected outcomes and decisions.

Evaluate the rationality behind purchasing insurance and warranties despite the cost exceeding expected claims.

Identify how individual differences in risk aversion affect financial decisions and utility.

Understand the concept of a fair insurance policy and how it is determined.

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Definitions:

Gender Biased

Having or showing an unfair tendency to believe that one gender is better or more important than the other.

Carol Gilligan

An American feminist, ethicist, and psychologist best known for her work on ethical community and ethical relationships, and certain subject-object problems in ethics.

Moral Development

The process through which individuals develop proper attitudes and behaviors towards other people in society, based on social and cultural norms, rules, and laws.

Conscience

A gut feeling or internal speech perceived as directing someone towards what is morally correct or incorrect in their conduct.