Jaune Magazine (JM) must decide whether or not to publish a tell-all story about

Question

Jaune Magazine (JM) must decide whether or not to publish a tell-all story about a celebrity. If the story ends up having major impact, JM will realize substantial profits from additional magazine sales, subscriptions, and advertising revenues. However, if JM publishes the story, JM will face a lawsuit; if it loses the suit, the penalties could be substantial. The tree below summarizes JM's decision.

The EMV of publishing the story is $10,000. Based on this EMV, JM should publish the story. If the publisher chooses not to publish the story, which of the following best describes the publisher's attitude towards this decision?

E) Risk averse. F) Risk neutral. G) Risk seeking. H) Risqué.

Explanation / Answer

Risk Averter

JM's decision of not publishing the story shows that he is a risk averter decision maker would select less risky alternative. The expected utility of the function is less than the utility of EMV.

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