Suppose you knew Alex has a utility function U\left(W\right)=\sqrt{W}U(W)=W​. Currently, Alex has $100,000. If both homes would cost Alex $100,000. What is Alex’s expected utility when purchasing the Victorian? Pick the closest integer BUT you'll need the precise answer in a couple questions.
Hint: In this question you need to know a little about rates of return. If I buy a house for $100,000 and then sell it for $125,000 that is a 25 percent rate of return because (125,000 - 100,000)/100,000 = .25. So suppose I had $200,000 in cash. If I bought a home for $100,000 now I have a house and $100,000 in the bank. If I flip the home for $125,000 now my total wealth is $225,000 (the $100,000 I had after purchase plus the amount I sold the home for). based on your expected utility calculations, would alex want to buy the victorian or the craftsman? hint: remember that you wanted to keep the precise answer for this question. but, just in case you didn't, ask yourself whether someone who is risk averse like alex likes large variance in her returns ... that will tell you what she's likely to want to avoid and therefore which one she would rather choose.
