Question

QUESTION 49 Why might we use rules of thumb? O they reduce bias they are irrational they are low cost they require design of optimal rules QUESTION 50 With a coin-toss, if it is heads you get $1 and if it is tails you get $11. If you are not willing to pay $6 for this gamble, you must be O risk-neutral risk averse O risk-loving O unlucky

Answer 1

49)50) expected value = sum of (probability*Outcome)

The reason why rule of thumb is used in many scenarios because of the fact that they are standard based on practice and can be done at low or no cost all in all. Therefore (c) they are low cost is answer to this question

= 0.5*$1+0.5*$11 = $6

Since the value is equal to price both risk loving and risk neutral will get to pay for it but not risk averse

Therefore (b) risk averse is the answer to the question