Question

Pierce Which of the following statements is therefore necessarily true for Pierce? has a concave utility of wealth function, u(x). Pierce prefers prospect X to prospect Y.
a. CE(X) > CE(Y).
b. U(EV(X)) > U(EV(Y))
c. EU(X) < EU(Y)
d. Y is a mean preserving spread of X.

Answer 1

Answer:

A)  CE(X) > CE(Y) is the correct answer.

Explanation:

Solution:

Correct Answer is A) CE(X) > CE(Y)

Because:

1. First of all, we are given that Pierce has a concave utility of wealth function u(x) which means Pierce is a kind of person who does not prefer taking risk.

2. Secondly, we are given that he prefers prospect X to Prospect Y.

3. Thirdly, Pierce will always make sure that Certainty Equivalent should be higher than others as Pierce does not want to take risks.

4. Lastly, he prefers X to Y so, he will make sure CE(X) must be greater than CE(Y) .

Hence,

A)  CE(X) > CE(Y) is the correct answer.