Answer :
To determine the expected utility of the given option, we'll make use of the provided utility function [tex]u(x) = x^{0.5}[/tex] and the probabilities for each outcome.
The concept of expected utility involves calculating the sum of the utilities of each possible outcome, each weighted by its probability.
Given:
- Option 1 pays $484 with probability 0.6
- Option 2 pays $1,681 with probability 0.4
First, we calculate the utility for each outcome:
Utility for $484:
[tex]u(484) = 484^{0.5}[/tex]
[tex]u(484) = 22[/tex]
Utility for $1,681:
[tex]u(1,681) = 1,681^{0.5}[/tex]
[tex]u(1,681) = 41[/tex]
Next, we calculate the expected utility using the formula:
[tex]\text{Expected Utility} = (\text{Probability of Outcome 1} \times \text{Utility of Outcome 1}) + (\text{Probability of Outcome 2} \times \text{Utility of Outcome 2})[/tex]
[tex]= (0.6 \times 22) + (0.4 \times 41)[/tex]
[tex]= 13.2 + 16.4[/tex]
[tex]= 29.6[/tex]
The expected utility of the option is 29.6.
Therefore, the correct multiple-choice answer is 29.6.