Reference no: EM131351694
You play a game where if the flip of a fair coin results in heads, you get $1,000; and nothing if it comes up tails. Answer each of the following questions:
a) If you’re risk averse, what is the amount (specify amount using either <, >, =) you would need to be paid to walk away from the game
b) If you’re risk seeking, what is the amount (specify $ amount using either <, >, =) you would need to be paid to walk away from the game?
c) If you’re risk neutral, what is the amount (specify $ amount using either <, >, =) you would need to be paid to walk away from the game?
ARE THE ANSERS BELOW CORRECT? DO YOU AGREE? EXPLAIN
a) If we are risk averse i.e. we avoid taking risk, we will prefer to take any amount =>$0(greater or equal to $0) as it is better than 50% of the game's outcome i.e. $0.
b) If we are risk seeking i.e. we love taking risk, we will need amount to take any amount >$1000(greater than $1000) in order to stop playing the game as it is better than 50% of the game's outcome i.e. $1000.
c) If we are risk neutral i.e. we are neutral toward risk taking, we will need amount to take any amount =>$500(greater than or equal to $500) as it is equal to the value of the game.
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