Cognitive Abilities Test (CAT4) Practice Exam

Expected utility theory is particularly applicable to decisions that involve risk and uncertainty, where individuals weigh the potentialbenefits against the potential costs of different choices. In the context of deciding between first-class and coach tickets, individuals must consider factors such as price differences, the value of comfort, and the likelihood of various experiences associated with each option.

In this scenario, the decision-maker evaluates not only the ticket prices but also what value they place on the benefits of first-class travel versus the cost savings of flying in coach. They might think about aspects like legroom, service quality, and overall travel experience, leading to a complex decision that incorporates their preferences, perceived risks, and expected outcomes. The application of expected utility theory allows for a structured approach to making this decision, aligning with how individuals assess their personal utility based on their unique valuations.

In contrast, while choosing a vacation destination, buying groceries, or ordering a meal might involve preferences, these decisions often come with more straightforward criteria and less significant inherent risk, making them less suited for the application of expected utility theory.