Joe's Wealth Is $100 and He Is an Expected Utility

question 16

Multiple Choice

Joe's wealth is $100 and he is an expected utility maximizer with a von Neumann-Morgenstern utility function U(W) =W^1/2.Joe is afraid of oversleeping his economics exam.He figures there is only a 1 in 10 chance that he will, but if he does, it will cost him $100 in fees to the university for taking an exam late.Joe's neighbor, Mary, never oversleeps.She offers to wake him one hour before the test, but he must pay her for this service.What is the most that Joe would be willing to pay for this wake-up service?

• A)$10
• B)$15
• C)$19
• D)$100
• E)$50

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Definitions:

Contribution Margin

The amount by which the sale of a product exceeds its variable costs, contributing towards covering fixed costs and generating profit.

Return On Investment (ROI)

A financial metric used to evaluate the efficiency or profitability of an investment, calculated by dividing the benefit (return) of an investment by the cost of the investment.

Net Operating Income

The total profit of a business after operating expenses are deducted but before taxes and interest are calculated.

Combined Margin

A measure used in financial analysis that aggregates gross profit, operating margin, and net margin.