If Ann's utility function is U = W^0.5,and she invests in a business which can yield $6,400 with probability 1/5,and $3600 with probability 4/5,then her expected wealth is A)$1280. B)$2880. C)$4160. D)$5840.

Question

Quizplus · Accepted Answer

We can first calculate the expected value of Ann's wealth:
E(W) = (1/5)($6,400) + (4/5)($3,600) = $1,760
Using this expected value and Ann's utility function, we can find the expected utility of each option:
Option 1: Invest in the business and receive $6,400
U1 = ($7,200)1(1)($1,760)0.5(1) = 84,840.43
Option 2: Invest in the business and receive $3,600
U2 = ($4,800)1(1)($1,760)0.5(1) = 54,623.68
Therefore, Ann should choose option 1, invest in the business and receive $6,400, as it has a higher expected utility.

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