A Decision-Maker Is Faced with a Choice Between a Lottery $U = I + 500$

question 32

Multiple Choice

A decision-maker is faced with a choice between a lottery with a 30% chance of a payoff of $30 and a 70% chance of a payoff of $80, and a guaranteed payoff of $65. If the decision maker's utility function is $U = I + 500$ , what is the risk premium associated with this choice?

• A) $0
• B) $1
• C) $2
• D) $3

---

Definitions:

Theory Y

A management concept that assumes employees are self-motivated, seek responsibility, and can be creative within work conditions.

Higher-level Needs

A concept from Maslow's hierarchy that refers to the psychological requirements for personal growth and fulfillment, beyond basic physiological or safety needs.

Working Conditions

The environment, terms, and circumstances under which employees perform their jobs, including safety, hours, space, and amenities.

Vroom

Refers to Victor Vroom, known for his work on the Expectancy Theory of motivation, which suggests that behavior results from conscious choices among alternatives whose purpose it is to maximize pleasure and minimize pain.