Sally Kink Is an Expected Utility Maximizer with Utility Function

question 9

Multiple Choice

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

• A)Sally will be risk averse if her income is less than $1,000 but risk loving if her income is more than $1,000.
• B)Sally will never take a bet if there is a chance that it leaves her with wealth less than $2,000.
• C)Sally will be risk neutral if her income is less than $1,000 and risk averse if her income is more than $1,000.
• D)For bets that involve no chance of her wealth exceeding $1,000, Sally will take any bet that has a positive expected net payoff.
• E)None of the above.

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Definitions:

Utility Function

A mathematical representation of how consumers rank different bundles of goods according to their level of satisfaction.

SAT Tests

Standardized tests widely used for college admissions in the United States, assessing mathematical, reading, and writing skills.

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The total amount of public and private expenditure on education, including wages of teachers, purchases of books and materials, and infrastructure investment.

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Quantitative measures or numerical values used to compare and assess the performance or characteristics of different entities.