An Individual Has Preferences Consistent with Standard Expected Utility Theory

question 9

Multiple Choice

An individual has preferences consistent with standard expected utility theory. They have utility function U(x) over wealth x. Starting with initial wealth of $10,000,the person is then faced with two choice problems. The first involves a choice between (A) no gamble and (B) a gamble with an equal chance of winning $1,800 and losing $1,000. The second choice problem,the person first has $1,000 taken away (resulting in the adjustment of the reference point) . The choice is then between (C) being given back $1,000 for sure and (D) an equal chance of winning $2,800 or nothing. What can be said about the choices the person would make?

• A)The person would never choose both A and D.
• B)The person would never choose both A and C.
• C)The person would choose A and D.
• D)The person would choose A and C.