Two individuals, and , are each offered a lottery paying Rs or Rs , each with probability ; the alternative is a fixed sum of money. Both are expected-utility maximizers. Individual prefers Rs with certainty to the lottery, and individual prefers a sure Rs to the lottery. Which statement is correct?
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Two individuals, 1 and 2, are each offered a lottery paying Rs 160 or Rs 80, each with probability 1/2; the alternative is a fixed sum of money. Both are expected-utility maximizers. Individual 1 prefers Rs 110 with certainty to the lottery, and individual 2 prefers a sure Rs 90 to the lottery. Which statement is correct? (A) both individuals are risk averse (B) 2 is risk averse but 1 loves risk (C) 1 is risk averse but 2 loves risk (D) none of the above
Choice under uncertainty has come up 27 times in 7 exams since 2007.
This question is on Risk aversion, certainty equivalent and risk premium, part of Choice under uncertainty in Microeconomics.
How the shape of utility reveals attitude to risk and how much a person would pay to avoid it.
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Question from the DSE 2015 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.