Option A has an expected value of $2,000, a minimum payoff of −$4,000, and a maximum payoff of $18,000. Option B has an expected value of $2,200, a minimum payoff of −$1,000, and a maximum payoff of $6,000. Option C has an expected value of $1,900, a minimum payoff of $100, and a maximum payoff of $2,000. In this situation, a risk-averse decision maker would pay __________ for his risk aversion, and a risk-seeking decision maker would pay __________ for his risk seeking.
A)$200; $300
B)$1,100; $5,000
C)$300; $200
D)$2,100; $16,000
E)$400; $200

Question

Quizplus · Accepted Answer

A risk-averse decision maker prefers certainty over uncertainty and would thus value the option with the least variability and a guaranteed positive outcome, which is Option C. The difference in expected value between Option B (the highest expected value) and Option C is $300 ($2,200 - $1,900), representing the premium a risk-averse individual would pay for lower risk. Conversely, a risk-seeking decision maker prefers the potential for higher returns, even with higher risk, and would pay a premium for Option A with its higher maximum payoff but lower expected value than Option B. The difference in expected value between Option B and Option A is $200 ($2,200 - $2,000), representing the premium a risk-seeking individual would pay for the chance at a higher payoff.

Option a Has an Expected Value of $2,000, a Minimum