Chapter 20, Problem 3P

To determine

Whether Vicky will invest in the company after considering expected value and expected utility of the investment

Concept Introduction:

Marginal Utility of Income- The additional/incremental utility derived by a unit increase in the individual’s income is the MU_y. Higher level of income implies higher human satisfaction and lower level of income implies less human satisfaction. The MU_y is however, diminishing as its utility yielding potential falls with increasing income.

Risk Aversive and Risk Loving behavior- A person with a decreasing MU_y is a risk aversive who attempts to lower uncertainty by avoiding gambling, while a person with an increasing MU_y is a risk loving person.

Expected Utility- The aggregate of the products of the utility derived from each outcome and its probability of occurrence is the expected value of the economic choices. It is a predictive value influencing economic decisions.

Expected Value- The aggregate of the products of the dollar value associated with each outcome and its probability of occurrence is the expected value of the economic choices. It is a predictive value influencing economic decisions. This is also called the Mathematical Expectation or the EV of an economic experiment.