When a consumer makes a risky decision, her:
A)utility function is weakly concave.
B)reservation price is her opportunity cost of risk.
C)consumption bundles are poorly defined.
D)demand functions are unknown.

Question

Quizplus · Accepted Answer

The reservation price is the price at which a consumer is indifferent between taking a risky decision and not taking it. The opportunity cost of risk is the expected value of the loss that the consumer will incur if she takes the risky decision. Therefore, the reservation price is equal to the opportunity cost of risk.

When a Consumer Makes a Risky Decision, Her