An index of environmental quality (EQ) has a scale from 0 (lowest) to 100 (highest) units. The social utility function is U=√EQ. The current environmental quality measure is EQ=53. A policy being debated has the following probability distribution over outcomes: Policy: EQ=81 with probability ½ and EQ=25 with probability ½. Experts suggest that if the policy is not enacted then EQ will likely fall from current levels.
How far could the index fall from current levels and still have expected social welfare maximized by NOT implementing the policy?
a) as much as 2 units of EQ
b) as much as 3 units of EQ
c) as much as 4 unit of EQ
d) as much as 5 units of EQ
e) social welfare will definitely increase with the policy