ohnny is indifferent between receiving a fixed payment of $20 or the chance to p

Question

ohnny is indifferent between receiving a fixed payment of $20 or the chance to play the following game where he would receive $50 with probability 0.6 and $0 with probability 0.4. Which of the following is true?

Note: If Johnny is indifferent, that means he would accept any amount over $20 in lieu of playing the game. He would play the game and refuse the fixed payment for any amount less than $20.

Johnny is risk-averse.

Johnny is risk loving

Johnny is risk neutral

We cannot conclude anything since Johnny is not really exposing himself to any risk.

Johnny is risk-averse.

Johnny is risk loving

Johnny is risk neutral

We cannot conclude anything since Johnny is not really exposing himself to any risk.

Explanation / Answer

The correct answer is: c)

Reason: Since Johnny is indifferent between the two scenarios, we can conclude him as being a risk neutral.

Thanks!

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