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. Simoneâs 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

(A) Simone will necessarily prefer Z to Y

Step-by-step explanation:

The expected value of Z is greater than the expected value of Y

EV(Z) > EV(Y)

hence Z has an expected utility that is greater than that of Y.