Consider a lottery with three possible outcomes:
| Outcomes | Probability | Reward/Win (in INR) |
|---|---|---|
| I | 0.2 | 25 |
| II | 0.3 | 50 |
| III | 0.5 | 100 |
The maximum amount that a risk-neutral person would be willing to pay to play the above lottery is INR ______ (in integer)
GATE 2025 Question 39: Choice under uncertainty
Answer and worked solution
Checking your account…
Choice under uncertainty has come up 27 times in 7 exams since 2007.
What this question tests
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.
TestStop has 16 past-paper questions on this subtopic; the nearest in year are below.
- GATE 2021 · Q13Piku faces a lottery with outcomes of ₹24, ₹12, ₹48 and ₹6 given by the following probability distribution |…
- IIT JAM 2021 · Q13The utility from wealth is u(w) = √w. An individual owns a risky asset that is equally likely to yield Rs.…
- GATE 2021 · Q16Consider an individual who maximizes her expected utility having Bernoulli utility function u(w)=α-β…
Similar questions from other papers
- If a consumer definitely prefers a payment of INR 90 for sure to a lottery which promises rewards of INR 100 or INR 0 with probabilities of 1/2 each, then we can say…
- An individual owns a mobile phone worth Rs. 40,000; current wealth is Rs. 2,00,000 (including the phone). There is a 20 percent chance of theft and an actuarially fair…
- Suppose a consumer has a utility function u(x) = 10*sqrt(x), where x is money income. The consumer's initial endowment is Rs. 50. She may suffer a loss of Rs. 25 with…
- An individual faces wealth Rs. 10 lakh with probability 0.75 and Rs. 7 lakh with probability 0.25. With utility U(w) = w³, the individual will buy full insurance by…
Question from the GATE 2025 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.