If Ann's utility function is U = W⁰.⁵,and she invests in a business which can yield $6,400 with probability 1/5,and $3600 with probability 4/5,then her expected utility is
A) 80.
B) 76.
C) 64.
D) 60.

Question

Quizplus · Accepted Answer

The expected utility is calculated by taking the weighted average of the utility of each outcome. The utility for $6,400 is 80 (since 6400^0.5 = 80) and for $3,600 is 60 (since 3600^0.5 = 60). The expected utility is (1/5)*80 + (4/5)*60 = 64.

If Ann's Utility Function Is U = W⁰