Sally Kink Is an Expected Utility Maximizer with Utility Function

question 23

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:

Cash Flow Statement

A financial statement that provides aggregate data regarding all cash inflows a company receives from its ongoing operations and external investment sources, as well as all cash outflows that pay for business activities and investments during a given period.

Retained Earnings

The portion of net income that is retained by the company rather than distributed to shareholders as dividends, representing the cumulative earnings of the company over time.

Common Stock

Equity ownership in a corporation, with rights to vote on corporate matters and share in the profits through dividends.

Net Income

The total profit of a company after all expenses, taxes, and deductions have been subtracted from total revenue.