Simone has a concave utility of wealth function, u(x). She is contemplating two prospects, Y and...
Simone has a concave utility of wealth function, u(x). She is contemplating two prospects, Y and Z. EV(Z) > EV(Y). Which of the following statements is true?
a. Simone will necessarily prefer Z to Y.
b. Simone’s ranking of Y and Z cannot be determined without knowing the distribution of the outcomes that result in EV(Y) and EV(Z).
c. Simone will necessarily prefer Y to Z.
d. Because EV(Z) > EV(Y), EU(Z) > EU(Y), but that is not sufficient information to determine her preference ranking.
Homework Answers
Answer is option B)
Since utility function is concave , hence individual is risk averse
Only a risk neutral agent prefers one lottery ( prospect) over the other based on the exoeexpe value of that lottery , so being risk averse, an agent can't prefer Z over Y, just on the basis of its expected value, hence option a & c are wrong.
We can't say that if expected value of Z is higher than that of Y, so it's expected utility will also be higher,so option d is wrong
This can't determine ranking of Z & Y
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