Suppose a decision maker has a utility function $$U = \sqrt { I }$$ and is faced with a lottery where there is a 30% chance of earning $30 and a 70% chance of earning $80. What is the expected utility of this lottery?
A)7.6
B)7.9
C)8.2
D)8.5

Question

Quizplus · Accepted Answer

The expected value of the lottery is:
(0.3)(30) + (0.7)(80) = 24 + 56 = 80
The expected utility of the lottery is:
√(24) + √(56) = 4.9 + 7.5 = 12.4
Therefore, the best choice is to select the lottery, as it has the highest expected utility.

Suppose a Decision Maker Has a Utility Function U=IU = \sqrt { I }U=I​

Suppose a Decision Maker Has a Utility Function $U = \sqrt { I }$