Sally Kink Is an Expected Utility Maximizer with Utility Function

question 31

Multiple Choice

Sally Kink is an expected utility maximizer with utility function pu(c₁) + (1 - p) u(c₂) , where for any x < $3,000, u(x) = 2x, and for x greater than or equal to $3,000, u(x) = 3,0001 + x.

• A)Sally will be risk averse if her income is less than $3,000 but risk loving if her income is more than $3,000.
• B)Sally will be risk neutral if her income is less than $3,000 and risk averse if her income is more than $3,000.
• C)For bets that involve no chance of her wealth exceeding $3,000, 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 $6,000.
• E)None of the above are true.

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Definitions:

Cognitive Dissonance

A mental struggle caused by holding conflicting beliefs and attitudes at the same time.

Leon Festinger

A social psychologist known for developing the theory of cognitive dissonance.

Theory

An organized collection of thoughts aimed at clarifying something, established on broad principles that are not derived from the phenomenon being clarified.

Fear Arousal

The process of inducing a state of fear in an individual, often used in psychological experiments or therapies.