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 20 percent chance of receiving $1,400 and an 80 percent chance of receiving $500 to receiving $680 for sure.
b. A shareholder prefers receiving $920 with certainty to an 80 percent chance of receiving $1,100 and a 20 percent chance of receiving $200.
c. A consumer is indifferent between receiving $1,360 for sure and a lottery that pays $2,000 with a 60 percent probability and $400 with a 40 percent probability.

Answer 1

RISK LOVING

RISK AVERSE

RISK NEUTRAL

Step-by-step explanation:

A risk loving person prefers an uncertain outcome to a certain outcome with equal reward. She derives a higher utility from an uncertain outcome

A risk averse person prefers an certain outcome to a uncertain outcome with equal reward. She derives a higher utility from an certain outcome

A risk neutral person is indifferent between a certain outcome and an uncertain outcome with equal reward.

1 0.2(1400) + 0.8(500) = 680

the manger is risk loving because he prefers the uncertain outcome