Question: Suppose that a decision maker's utility as a function of her wealth, x , is given by U ( x ) = ln (2 x-1000)

Suppose that a decision maker's utility as a function of her wealth,x, is given byU(x) = ln (2x-1000)(where ln is the natural logarithm).

The decision maker now has $10,000 and two possible decisions. For Alternative 1, she gains $1250 for certain. For Alternative 2, she gains $2000with probability 0.9 and loses $4,000 with probability 0.1. Which alternative should she choose and what is her expected utility (rounded to 2 decimals)?

a.She should choose Alternative 1 because there is no risk.

b.She should choose Alternative 1. Her expected utility is 9.98.

c.She should choose Alternative 2. Her expected utility is 9.99.

d.She is indifferent between the two alternatives as both options give her the same expected utility.

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