Assuming you are rsk neutral, frst answer the following two questions about your preferences: Scenario A You are given $5.000 and offered a choice behween receiving an extra $2.500 with certainty or fipping a coin and getting $5.000 t heads or S0 f talin. Which option do you prefer? A The certain S2.500 is more valuable than the uncertain $5.000, I would choose the $2.500 Both options have identical payofs, so l am indiferent between the two options c The possibility of the 55.000 payof is more valuable to me than the oertain $2.500, I choose to fip a coin. Soenario B. You are given 510.000 f you will make the folowing choioe: retum $2.500 or fip a coin and retum $5.000 heads and So as Which option do you prefer? A The certain loss of $2.500 is more paintu than the possible loss of S5.000, I choose to fip a coin. The ponsbity of the loss of 5.000 is more paintu to me than the certain lons of $2.500, I would choose the $2.500 certan ioss c Both options have identical payoffs, sol am indiferent between the two options Most people choose the sure $2.500 in the frst case but fip the coin in the second. Why is this behavior is not consistent to a risk nutral person? A The behavior is not consistent because a risk neutral person is atways able to choose the less eky option B. The behavior is consistent because scenarie Bis nskier OC The behavior is not consistent because scenario Bis rickier OD. The behavior is not consistent because the hwo experiments have equal payofts
Assuming you are rsk neutral, frst answer the following two questions about your preferences: Scenario A You are given $5.000 and offered a choice behween receiving an extra $2.500 with certainty or fipping a coin and getting $5.000 t heads or S0 f talin. Which option do you prefer? A The certain S2.500 is more valuable than the uncertain $5.000, I would choose the $2.500 Both options have identical payofs, so l am indiferent between the two options c The possibility of the 55.000 payof is more valuable to me than the oertain $2.500, I choose to fip a coin. Soenario B. You are given 510.000 f you will make the folowing choioe: retum $2.500 or fip a coin and retum $5.000 heads and So as Which option do you prefer? A The certain loss of $2.500 is more paintu than the possible loss of S5.000, I choose to fip a coin. The ponsbity of the loss of 5.000 is more paintu to me than the certain lons of $2.500, I would choose the $2.500 certan ioss c Both options have identical payoffs, sol am indiferent between the two options Most people choose the sure $2.500 in the frst case but fip the coin in the second. Why is this behavior is not consistent to a risk nutral person? A The behavior is not consistent because a risk neutral person is atways able to choose the less eky option B. The behavior is consistent because scenarie Bis nskier OC The behavior is not consistent because scenario Bis rickier OD. The behavior is not consistent because the hwo experiments have equal payofts
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Assuming you are risk neutral, frast answer the folowing two questions about your preferences:
Scenario A: You are given $5.000 and offered a choice beheeen receiving an extra $2.500 with certainty or fipping a coin and getting $5.000 t heads or S0 if tain.
Which option do you prefer?
A The certain $2.500 is more valuable than the uncertain $5.000, I would choose the $2.500
Both options have identical payofs, so l am indiferent between the two options.
The possibility of the 5.000 payoff is more valuable to me than the oertain $2.500, I chocse to fio a coin
Scenario B. You are given $10.000 f you wil make the following choice: retum $2.500 or fip a coin and retum $5.000 heads and so tai. Which opton do you
prefer?
A The certain los of S$2.500 is more paintu than the possible loss of $5,000, I choose to fip a coin.
OR The ponsibility of the los of $5.000 is more paintul to me than the certain los of $2.500, I would choose the $2.500 certan loss
re Both options have identical payoffs, so i am indiferent between the two options.
Mont people choose the sure 52.500 in the frast case but fip the coin in the second Why is this behavior is not consistent to a rsk neutral person?
A The behavior is not consistent becausea risk
OB The behavior is consistent because scenario Bis riskier.
neutral person is always atle to choose the les reky option.
C. The behavior is not consistent because scenano Bis riskier
OD. The behavior is not consistent because the two experiments have equal payoffs
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