Sally Kink Is an Expected Utility Maximizer with Utility Function

question 1

Multiple Choice

Sally Kink is an expected utility maximizer with utility function pu(c₁) + (1 - p) u(c₂) , where for any x < 7,000, u(x) = 2x, and for x greater than or equal to 7,000, u(x) = 14,000 + x.

• A)Sally will be risk averse if her income is less than $7,000 but risk loving if her income is more than $7,000.
• B)Sally will be risk neutral if her income is less than $7,000 and risk averse if her income is more than $7,000.
• C)Sally will never take a bet if there is a chance that it leaves her with wealth less than $14,000.
• D)For bets that involve no chance of her wealth exceeding $7,000, Sally will take any bet that has a positive expected net payoff.
• E)None of the above.

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Definitions:

Marginal Cost Curve

A graphical representation showing how the cost to produce one additional unit varies with the quantity of output produced, typically upward sloping due to increasing marginal costs.

Average Variable Cost

The total variable cost of production divided by the quantity of output, representing the variable cost per unit of output.

Average Total Cost

The total cost of production divided by the number of goods produced; it includes both fixed and variable costs.

Marginal Revenue

The incremental income produced through the sale of one additional unit of a good or service.