Question

​Lori, who is risk​ averse, has two pieces of​ jewelry, each worth​ $1,000. She plans to send them to her​ sister's firm in Thailand to be sold there. She is concerned about the safety of shipping them. She believes that the probability that any box shipped will not reach its destination is theta. Is her expected utility higher if she sends the articles together or in two separate​ shipments? ​Lori's expected utility is A. the same whether she sends the jewelry to Thailand in one box or in separate boxes. B. higher if she sends the jewelry to Thailand in one box regardless of her preferences for risk. C. higher if she sends the jewelry to Thailand in one box because​ she's risk averse. D. higher if she sends the jewelry to Thailand in separate boxes regardless of her preferences for risk. E. higher if she sends the jewelry to Thailand in separate boxes because​ she's risk averse.

Answer 1

The correct answer is the option E: higher if she sends the jewelry to Thailand in separate boxes because she's risk averse.

Step-by-step explanation:

On the one hand, if Lori is risk averse then that means that she tends to prefer the less risk that can be in the moment of making a decision without given importance to what she can make of that decision.

On the other hand, the expected utility hypothesis states that Lori will choose the option that will have a greater utility according to the situations.

In conclussion, Lori will choose to send the jewelry to Thailand in separate boxes because she is risk averse and she will prefer to expend more money and lower the risks and by doing that she will have a higher expected utility.