Sally Kink Is an Expected Utility Maximizer with Utility Function

question 2

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 averse if her income is less than $6,000 but risk loving if her income is more than $6,000.
• B)Sally will be risk neutral if her income is less than $6,000 and risk averse 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:

Libido

In psychoanalytic theory, it refers to the energy of the sexual drive as a component of the life instinct.

Freudian Theory

A set of psychoanalytic theories developed by Sigmund Freud that emphasize unconscious motivations and conflicts as the drivers of human behavior.

Scientific Methodology

A systematic approach to research in which a problem is identified, relevant data are gathered, a hypothesis is formulated from these data, and the hypothesis is empirically tested.

Psychosexual Stage

A concept in Freudian psychology that describes the series of stages of childhood development through which sexual impulses are expressed in different ways.