Question

a. If your are offered a gift card valued $50 or the chance at a raffle for a giftcard valued $100, with a 50% chance at getting the giftcard or a 50% chance of getting nothing, which would you choose? Given this answer explain whether you are risk averse, risk loving, or risk neutral and why. 30 50 75 100 7) The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. The midpoint of the chord that runs from zero and intersects the utility function where wealth is 100, represents Bob's A) risk premium. B) expected utility of receiving $50 with certainty. C) expected utility of receiving $0 50% of the time and $100 50% of the time. D) risk neutrality

Answer 1

a. I would rather win a gift card so I can get whatever I want it would depend on it gift card. risk lover, preferring a risky income to a certain income with the same expected value.

7. the midpoint of the chord that runs from zero and intersects the utility function where wealth is 100,  represents Bob's

expected utility of receiving $0 50% of the time and $100 50% of the time.

8. Bob's expected utility is at point a. it is the sum of the utilities associated with all possible outcomes, weighted by the probability that each outcome will occur.

9.Bob is risk averse. because he willing to pay a premium to avoid a risky situation.

10.to reduce the chance of theft to zero. Bob is willing to pay $70 to ensure himself against such a loss.