Figure 27-1
The following figure shows a utility function for Ren.
-Refer to Figure 27-1. Suppose Ren begins with $1,050 in wealth. Which of the following coin-flip bets would he definitely not be willing to accept?
A)If it is "heads," he wins $109; if it is tails, he loses $104.
B)If it is "heads," he wins $150; if it is tails, he loses $150.
C)If it is "heads," he wins $150; if it is tails, he loses $140.
D)He definitely would not accept any of these bets.

Question

Figure 27-1
The following figure shows a utility function for Ren. 
-Refer to Figure 27-1. Suppose Ren begins with $1,050 in wealth. Which of the following coin-flip bets would he definitely not be willing to accept?
A)If it is "heads," he wins $109; if it is tails, he loses $104. 
B)If it is "heads," he wins $150; if it is tails, he loses $150. 
C)If it is "heads," he wins $150; if it is tails, he loses $140. 
D)He definitely would not accept any of these bets.

Quizplus · Accepted Answer

Given Ren's initial wealth of $1,050, he would not accept a bet where the potential loss is the same as the potential gain (Option B), because if he is risk-averse, he would prefer to avoid a bet where there's a 50% chance of losing $150, as the utility loss from losing $150 would likely outweigh the utility gain from winning $150.

Figure 27-1 The Following Figure Shows a Utility Function for Ren