Kevin has a utility functionU=W^1/2

, whereW is his wealth in millions of dollars andUis the utility he obtains from that wealth. In the final stage of a game show, the host offers Kevin a choice between (A) $9 million for sure, or (B) a gamble that pays $1 million with probability 0.4 and $16 million with probability 0.6.

Use the blue curve (circle points) to graph Kevin's utility function at wealth levels of $0, $1 million, $4 million, $9 million, and $16 million.

true or False: Kevin is risk averse.

True

False

Choice (A/B) offers Kevin a higher expected prize. (Hint: The expected value of a random variable is the weighted average of the possible outcomes, where the probabilities are the weights.)

Choice (A/B)offers Kevin a higher expected utility.

Kevin should pick choice (A/B).