Asked by Tasha Christina on May 30, 2024
Verified
Prufrock is risk averse.He is offered a gamble in which with probability 1/4 he will lose $1,000 and with probability 3/4, he will win $500.
A) Since he is risk averse, he will certainly not take the gamble.
B) Since the expected value of the gamble is positive, he will certainly take the gamble.
C) If Prufrock's initial wealth is greater than $1,500, he will certainly take the gamble.
D) If Prufrock's initial wealth is smaller than $1,500, he will certainly not take the gamble.
E) Not enough information is given to determine for sure whether he will take the gamble.
Risk Averse
A description of an individual or entity's preference to avoid uncertainty, often choosing options with more predictable outcomes.
Probability
A measure of the likelihood that an event will occur, expressed as a number between 0 and 1.
- Master the concept of risk aversion and how it guides the decision-making in scenarios characterized by unpredictability.
- Determine the expected yield of a gambling activity and examine it in relation to guaranteed outcomes for making intelligent choices.
Verified Answer
SA
salwa albohyJun 04, 2024
Final Answer :
E
Explanation :
Being risk-averse means Prufrock prefers avoiding losses over acquiring equivalent gains, but this does not directly correlate with his decision to take the gamble, as it depends on his utility function and not just on the expected value or his initial wealth.
Learning Objectives
- Master the concept of risk aversion and how it guides the decision-making in scenarios characterized by unpredictability.
- Determine the expected yield of a gambling activity and examine it in relation to guaranteed outcomes for making intelligent choices.