Question

Ana is facing a lottery that pays off $200 with probability 2/3 and $500 with probability 1/3. If Ana has a certainty equivalent of $312 for this lottery, then she must be:

a. either risk averse or risk neutral.
b. only risk neutral.
c. either risk loving or risk neutral.
d. only risk loving.
e. only risk averse.

Answer 1

Answer: only risk loving

Step-by-step explanation:

From the information given in the question, the expected monetary value (EMV) will be calculated as:

= $200 × (2/3) + $500 × (1/3)

= $300

Since the certain equivalent of $312 is more than the expected monetary value (EMV) of $300, then Ana is only risk loving.

Therefore, the correct option is D.