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:

Simple Linear Regression

A statistical method that shows or predicts the relationship between two continuous variables, using a straight line to describe the linear relationship.

Correlation Coefficient

A statistical measure that calculates the strength and direction of a linear relationship between two quantitative variables.

Residuals

Differences between observed values and the estimated values in a statistical model, reflecting the amount of unexplained variance in the model.

Fitted Values

Estimated values predicted by a regression model, based on the observed data.