Question: A bettor with utility function U(x) = ln(x), where x is total wealth, has a choice between the following two alternatives: A Win $10,000 with

A bettor with utility function U(x) = ln(x), where x is total wealth, has a choice between the following two alternatives:

A Win $10,000 with probability 0.2

Win $1,000 with probability 0.8

B Win $3,000 with probability 0.9

Lose $2,000 with probability 0.1

a. If the bettor currently has $2,500, should he choose A or B?

b. Repeat a, assuming the bettor has $5,000.

c. Repeat a, assuming the bettor has $10,000.

d. Do you think that this pattern of choices between A and B is reasonable? Why or why not?

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a If wealth 2500 then EUA 02 ln12500 08 ln 3500 8415 EUB 09 ln5500 01 ln500 8373 Cho... View full answer

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