Scenario 27-2

Suppose Dave has a utility function
$$U = 4 W ^ { 1 / 2 }$$ where W is his wealth in millions of dollars and U is the utility he obtains.

-Refer to Scenario 27-2. Suppose Dave is faced with a choice between two options. With option A Dave receives a guaranteed $2 million. With option B Dave faces a lottery that pays $10 million with probability P and pays $0 with probability (1-P). Given Dave's utility function, how high does P need to be before he will prefer option B over option A?

Question

Scenario 27-2
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Suppose Dave has a utility function
 $$U = 4 W ^ { 1 / 2 }$$ where W is his wealth in millions of dollars and U is the utility he obtains.
​
-Refer to Scenario 27-2. Suppose Dave is faced with a choice between two options. With option A Dave receives a guaranteed $2 million. With option B Dave faces a lottery that pays $10 million with probability P and pays $0 with probability (1-P). Given Dave's utility function, how high does P need to be before he will prefer option B over option A?

Quizplus · Accepted Answer

The Answer of Scenario 27-2
​
Suppose Dave has a utility function
 $$U = 4 W ^ { 1 / 2 }$$ where W is his wealth in millions of dollars and U is the utility he obtains.
​
-Refer to Scenario 27-2. Suppose Dave is faced with a choice between two options. With option A Dave receives a guaranteed $2 million. With option B Dave faces a lottery that pays $10 million with probability P and pays $0 with probability (1-P). Given Dave's utility function, how high does P need to be before he will prefer option B over option A?

Scenario 27-2 ​ Suppose Dave Has a Utility Function U=4W1/2U = 4 W ^ { 1 / 2 }U=4W1/2

Scenario 27-2

Suppose Dave Has a Utility Function $U = 4 W ^ { 1 / 2 }$