Prufrock is risk averse. He is oered a gamble in which with probability 1=4 he w

Question

Prufrock is risk averse. He is oered a gamble in which with probability 1=4 he will lose

$1000 and with probability 3=4; he will win $500. (show work or explain)

(a) Since he is risk averse, he will certainly not take the gamble.

(b) Since the expected value of the gamble is positive, he will certainly take the gamble.

(c) If Prufrock's initial wealth is greater than $1,500, then he will certainly take the gamble.

(d) If Prufrock's initial wealth is smaller than $1,500, he will certainly not take the gamble.

(e) Not enough information is given to determine for sure whether he will take the gamble.

Explanation / Answer

(a) Since he is risk averse, he will certainly not take the gamble

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