Question

Billy has a von Neumann-Morgenstern utility function U(c) = c 1/2. If Billy is not injured this season, he will receive an income of 25 million dollars. If he is injured, his income will be only 10,000 dollars. The probability that he will be injured is .1 and the probability that he will not be injured is .9. His expected utility is

Answer 1

Answer: The expected utility is 0.59.

Step-by-step explanation:

Since we have given that

$U(c)=\sqrt{c}$

Probability that he will be injured = 0.1

Probability that he will not be injured = 0.9

If Billy is not injured this season, he will receive an income of 25 million dollars.

and

If he is injured, his income will be only 10,000 dollars.

According to question, the expected utility is given by

$E[x]=0.9\times \sqrt{(0.01)}+0.1\times \sqrt{25}\\\\E[x]=0.9\times 0.1+0.1\times 5\\\\E[x]=0.09+0.5\\\\E[x]=0.59$

Hence, the expected utility is 0.59.