Sally Kink Is an Expected Utility Maximizer with Utility Function

question 7

Multiple Choice

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

• A)For bets that involve no chance of her wealth exceeding $2,000, Sally will take any bet that has a positive expected net payoff.
• B)Sally will be risk averse if her income is less than $2,000 but risk loving if her income is more than $2,000.
• C)Sally will be risk neutral if her income is less than $2,000 and risk averse if her income is more than $2,000.
• D)Sally will never take a bet if there is a chance that it leaves her with wealth less than $4,000.
• E)None of the above are true.

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Definitions:

Spillover Costs

Costs incurred by third parties as a result of economic activities that are not reflected in market transactions.

Concentrated Benefits

Advantages that are significantly focused on a small group rather than being distributed widely across many individuals.

Diffuse Costs

Costs that are spread out over many consumers or taxpayers, making them hard to identify and attribute to any single action.

Median-Voter Model

A theory suggesting that the outcome of majority voting processes will reflect the preferences of the median voter.