-Beachcomber Beatrice spent her entire wealth of $100,000 to build a beach house on the Gulf of Mexico. There is a 10 percent chance that the house will be totally destroyed by a hurricane. Beatrice's utility of wealth schedule is given in the table above. What is Beatrice's expected utility of wealth?
A) between 0 and 200
B) 245
C) 270
D) between 287 and 300

Question

-Beachcomber Beatrice spent her entire wealth of $100,000 to build a beach house on the Gulf of Mexico. There is a 10 percent chance that the house will be totally destroyed by a hurricane. Beatrice's utility of wealth schedule is given in the table above. What is Beatrice's expected utility of wealth?
A) between 0 and 200 
B) 245 
C) 270 
D) between 287 and 300

Quizplus · Accepted Answer

The expected utility is calculated by considering the probability of each outcome and its corresponding utility. With a 90% chance of keeping the house (utility of $100,000) and a 10% chance of losing it (utility of $0), the expected utility is 0.9 * utility($100,000) + 0.1 * utility($0). Given the utility schedule, this results in an expected utility of 270.

-Beachcomber Beatrice Spent Her Entire Wealth of $100,000 to Build