Lawrence's Expected Utility Function Is Pc^1/2₁ + (1 - P)c^1/2₂

question 15

Multiple Choice

Lawrence's expected utility function is pc^1/2₁ + (1 - p) c^1/2₂, where p is the probability that he consumes c₁ and 1 - p is the probability that he consumes c₂.Lawrence is offered a choice between getting a sure payment of $Z or a lottery in which he receives $400 with probability .30 or $2,500 with probability .70.Lawrence will choose the sure payment if

• A)Z > 1,040.50 and the lottery if Z < 1,040.50.
• B)Z > 2,500 and the lottery if Z < 2,500.
• C)Z > 2,090.50 and the lottery if Z < 2,090.50.
• D)Z > 1,681 and the lottery if Z < 1,681.
• E)Z > 1,870 and the lottery if Z < 1,870.

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Definitions:

Absorption Costing

A method of costing that includes all manufacturing costs - direct materials, direct labor, and both variable and fixed overhead - as part of the cost of a product.

Variable Costing

A costing method that includes only variable production costs (direct material, direct labor, and variable manufacturing overhead) in product costs.

Net Operating Income

A company's total earnings from its operations, excluding non-operating income and expenses, interest, and taxes.

Absorption Costing

This accounting strategy entails calculating a product's cost by including all costs related to its manufacturing, comprising direct materials, direct labor, and all categories of manufacturing overhead, both variable and fixed.