Question

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.

Answer 1

Answer:

b. Simone ranking of Y and Z cannot be determined without knowing the distribution of outcomes that result in EV(Y) and EV(Z).

Explanation:

The utility wealth function describes the satisfaction of a consumer by the consumption of real goods and services. The utility function of Simone cannot be determined without knowing the opportunity cost between Y and Z.