Consider the following scenario when answering the following questions:
Suppose that,in an experimental setting,100 students are presented with two situations involving risk and return.The students are first asked to choose between Gamble A and Gamble B,where:

Gamble A: The student will receive $1 million with a 100 percent probability.

Gamble B: The student will receive $1 million with an 89 percent probability,$5 million with a 10 percent probability,and $0 million (nothing)with a 1 percent probability.

The students are then asked to choose between Gamble C and Gamble D,where:

Gamble C: The student will receive $5 million with a 10 percent probability.

Gamble D: The student will receive $1 million with an 11 percent probability.
-According to the standard economic model (expected utility theory),a student who is risk neutral would choose Gambles ________ because they both have higher expected values than ________,respectively.
A) A and D; B and C
B) A and C; B and D
C) B and C; A and D
D) B and D; A and C
E) B and C; A and D.

Question

Consider the following scenario when answering the following questions:
Suppose that,in an experimental setting,100 students are presented with two situations involving risk and return.The students are first asked to choose between Gamble A and Gamble B,where:

Gamble A: The student will receive $1 million with a 100 percent probability.

Gamble B: The student will receive $1 million with an 89 percent probability,$5 million with a 10 percent probability,and $0 million (nothing)with a 1 percent probability.

The students are then asked to choose between Gamble C and Gamble D,where:

Gamble C: The student will receive $5 million with a 10 percent probability.

Gamble D: The student will receive $1 million with an 11 percent probability.
-According to the standard economic model (expected utility theory),a student who is risk neutral would choose Gambles ________ because they both have higher expected values than ________,respectively.
A) A and D; B and C
B) A and C; B and D
C) B and C; A and D
D) B and D; A and C
E) B and C; A and D.

Quizplus · Accepted Answer

B and C; A and DTo determine the choices of a risk-neutral student based on expected utility theory, we calculate the expected values of each gamble. For a risk-neutral individual, the choice between gambles depends solely on the expected value, which is calculated as the sum of the probabilities of outcomes multiplied by their respective values.- Gamble A: $1 million with 100% probability = $1 million expected value.- Gamble B: ($1 million * 89%) + ($5 million * 10%) + ($0 million * 1%) = $0.89 million + $0.5 million + $0 = $1.39 million expected value.- Gamble C: $5 million with 10% probability = $0.5 million expected value.- Gamble D: $1 million with 11% probability = $0.11 million expected value.Comparing the expected values, Gamble B has a higher expected value than Gamble A ($1.39 million > $1 million), and Gamble C has a higher expected value than Gamble D ($0.5 million > $0.11 million). Therefore, a risk-neutral student would choose Gamble B over Gamble A and Gamble C over Gamble D, which corresponds to choice C.

Consider the Following Scenario When Answering the Following Questions