Obi-Wan is considering whether to buy a lightsaber. With probability 0.50 he will value the lightsaber at $4,000, and with probability 0.50 he will value it at $1,000. If Obi-Wan is risk averse, then he will be willing to pay ________ for a new lightsaber.
A)more than $4,000
B)more than $2,500
C)less than $4,000
D)less than $2,500

Question

Quizplus · Accepted Answer

For Obi-Wan, the expected value of buying a lightsaber is (0.50 × $4,000)+ (0.50 × $1,000)= $2,500, so if Obi-Wan is risk averse, then he will be willing to pay less than $2,500 for it.

Obi-Wan Is Considering Whether to Buy a Lightsaber