-The above figure shows Bob's utility function.He currently has $50 and is considering investing all of it in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0.Bob will
A) definitely make the investment because the expected utility of the investment exceeds the utility of his $50.
B) definitely not make the investment because the expected utility of the investment is less than the utility of his $50.
C) definitely make the investment because he is indifferent between having $50 and having an investment with an expected value of $50.
D) definitely not make the investment because he is indifferent between having $50 and having an investment with an expected value of $50.

Question

-The above figure shows Bob's utility function.He currently has $50 and is considering investing all of it in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0.Bob will
A) definitely make the investment because the expected utility of the investment exceeds the utility of his $50. 
B) definitely not make the investment because the expected utility of the investment is less than the utility of his $50. 
C) definitely make the investment because he is indifferent between having $50 and having an investment with an expected value of $50. 
D) definitely not make the investment because he is indifferent between having $50 and having an investment with an expected value of $50.

Quizplus · Accepted Answer

The expected utility of the investment is calculated by taking the average of the utility values for the possible outcomes ($100 and $0, each with a 50% chance). If this expected utility is lower than the utility of keeping $50, Bob will not make the investment because it means he would expect to be worse off, according to his utility function. This decision reflects risk aversion, where the certainty of keeping $50 is preferred over a risky investment with the same expected monetary value but lower expected utility.

-The Above Figure Shows Bob's Utility Function