Consider the following scenario when answering the following questions:
Suppose that,in an experimental setting,100 students are asked to choose between Gamble A and Gamble B,where:
Gamble A: The student will receive $5 million with a 100 percent probability.
Gamble B: The student will receive $5 million with a 51 percent probability,$10 million with a 25 percent probability,and $0 million (nothing)with a 24 percent probability.
-A risk-neutral student is
A) likely to choose Gamble A because it has a higher expected value.
B) likely to choose Gamble B because it has a higher expected value.
C) likely to choose Gamble A because the student will win something (as opposed to nothing)with a higher probability.
D) likely to choose Gamble B because the student will win something (as opposed to nothing)with a higher probability.
E) indifferent toward Gambles A and B because they have the same expected value.

Question

Quizplus · Accepted Answer

A risk-neutral student would choose the option with the higher expected value, which is Gamble B. The expected value of Gamble A is $5 million, while the expected value of Gamble B is [($5 million x 0.51) + ($10 million x 0.25) + ($0 million x 0.24)] = $5.25 million. Therefore, a risk-neutral student would choose Gamble B.

Consider the Following Scenario When Answering the Following Questions