Question

Suppose my utility function for asset position x is given by u(x)=ln x.

I now have $10000 and am considering the following two lotteries:

L1: With probability 1, I lose $2000.

L2: With probability 0.8, I gain $0, and with probability 0.2, I lose $5000.

What is expected utility of L1 and L2? Determine which lottery I prefer based on expected utility criterion.

Select one:

a. Expected utility of L1=9.072, Expected utility of L2=8.987, L1 is preferred.

b. Expected utility of L1=8.987, Expected utility of L2=9.072, L2 is preferred.

c. Expected utility of L1=9.626, Expected utility of L2=9.547, L1 is preferred.

d. Expected utility of L1=9.547, Expected utility of L2=9.626, L2 is preferred.

e. Expected utility of L1=9.834, Expected utility of L2=9.852, L2 is preferred.

f. Expected utility of L1=9.852, Expected utility of L2=9.834, L1 is preferred.

Clear my choice

Answer 1

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