Question

You are given $5,000 and offered a choice between receiving an extra $2,500 with certainty or flipping a coin and getting $5,000 if heads or $0 if tails. Which option do you prefer?

a) You are indifferent between the two options.

b) You would choose $2,500 because the certain $2,500 is more valuable than the uncertain $5,000.

c) You would choose uncertain $5,000.

d) None of the above.

Answer 1

You have a offered to choice between receiving an extra $2,500 with certainty or flipping a coin and getting $5,000 if heads or $0 if tails

Probability of getting heads (Ph) = 0.5

Probability of getting tails (Pt) = 0.5

Flipping a coin and getting $5000 if heads or $0 tails.

Expected Income = ($5000) (0.5) + ($0) (0.5)

Expected income = $2500

Expected income is $2500 in case of flipping a coin case.

Expected income is $2500 if person get the amount with certainty.

Therefore, you are different between the two options.

Answer: Option (A)  .