Question

Which of the following statements describes a risk loving individual? Her certainty equivalent is greater than the expected value of the income from the chosen activity Her certainty equivalent is less than the expected value of the income from the chosen activity Her certainty equivalent is equal to the expected value of the income from the chosen activity None of the above

Answer 1

Risk loving individual is defined as the individual who is willing to take risk or who is ready to invest large amount of money at risk in order to earn higher returns.

Certainty equivalent is the guaranteed amount of money that the individual would get in return of taking a higher chance of risk. So far as certainty equivalent of risk loving individual is concerned , it would be high because she is spending maximum amount of money for the risky prospect with the same expected income and is also using the market in order to get the uncertain outcome, and hence her return will also be high.

Thus option (A) is correct i.e. her certainty equivalent is greater than the expected value of income from the choosen activity.