Question: S. Suppose that Maria seeks to maximize the expected value of the benefit function W(F) = 1000F F 2 (for values of F below 100).

  • S. Suppose that Maria seeks to maximize the expected value of the benefit function W(F) = 1000F −F 2 (for values of F below 100). Maria consumes 50 kg of food when it is sunny and 30 kg when there is a hurricane. There is a 25% chance of a hurricane We can see Maria’s consumption as a lottery L = (0.25 : 30; 0.75 : 50). Calculate the expected utility from having this lottery. Calculate the expected value of this lottery, and the utility of receiving this expected value with certainty, i.e., of receiving this expected value in both states of nature. Which is larger—the expected utility of the lottery, or the utility of the expected value of the lottery? What does this tell you about this person’s attitude toward risk?

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