1. The expected value of a gamble Aa Aa Carl and Amy are friends who are attendi
ID: 1148288 • Letter: 1
Question
1. The expected value of a gamble Aa Aa Carl and Amy are friends who are attending a "casino night" at a charity fundraiser. Once inside, there's a table at which you can gamble: For $10, you can flip a coin. If it comes up heads, you get $15 back, for a gain of $5. If it comes up tails, you get $5 back, for a loss of $5. For all parts of this question, assume that, if you are indifferent between taking the gamble and not taking it, you will take the gamble. This game is Suppose Amy decides not to take the gamble. Can you conclude from this that she is risk neutral? O No Yes Suppose Carl decides to take the gamble. Suppose a different table offers another $10 coin flip where heads pays $25 and tails pays $0. Can you conclude that he would also accept this gamble? O Yes O NoExplanation / Answer
This gamble is a fair gamble (expected payoff = 0.5 x 5 - 0.5 x 5 = 0)
No, Amy deciding not to take the gamble would mean she is risk averse.
Carl is risk neutral since he decides to take the gamble.
Yes, he would accept the new gamble as expected payoff > 0 (= 0.5 x 15 + 0.5 x -10 = $ 2.5)
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