Question

Pierce has a concave utility of wealth function, u(x). Pierce prefers prospect X to prospect Y.

Which of the following statements is therefore necessarily true for Pierce?
a. CE(X) > CE(Y).
b. EU(X) > EU(Y)
c. U^-1 (EU(X)) > U^-1 (EU(Y))
d. All of the above.

Answer 1

a. CE(X) > CE(Y).

Step-by-step explanation:

In the case when X would be preferred over the Y

So,

CE X > CE Y

Let us assume U = √W

And,

Let us assume that

EUx = 5, EUy = 4

So,

√CEx = EUx = 5

CEx = 25,

Like that CEy = 16.

Therefore

CEx > CEy

Hence, the correct option is A