For each of the following scenarios, determine whether the decision maker is ris
ID: 1249742 • Letter: F
Question
For each of the following scenarios, determine whether the decision maker is risk neutral, risk averse, or risk loving.a. A manager prefers a 10 percent chance of receiving $1,000 and a 90 percent chance of receiving $100 to receiving $190 for sure.
b. A shareholder prefers receiving $775 with certainty to a 75 percent chance of receiving $1,000 and a 25 percent chance of receiving $100.
c. A consumer is indifferent between receiving $550 for sure and a lottery that pays $1,000 half of the time and $100 half of the time.
Explanation / Answer
a) prefers expected receipts = 0.1*1000 + 0.9*100 = 100 + 90 = 190 ($) to sure amount of $190 . It is a case of risk loving investor. He prefers take chances for he thinks he may have chance to get more than expected return or sure amount. b) Sure amount $775 preferred to expected amount of (0.75*1000 + 0.25*100) i.e. $775 It is a case of risk averse investor. He prefers sure amount. He does not want to take risk of getting less than sure amount. c) Indifferent to sure of $550 or expected $ (0.5*1000 +0.5*100) i.e. $550. It is a case of risk neutral investor. He is neutral to sure amount or chance amount.
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