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 new lightsabers sell for $2,500, then buying a new lightsaber is a:
A)fair gamble.
B)better-than-fair gamble.
C)less-than-fair gamble.
D)less-than-fair gamble if Obi-Wan risk neutral.

Question

Quizplus · Accepted Answer

For Obi-Wan, buying a lightsaber is a gamble with an expected value of (0.50 × $4,000)+ (0.50 × $1,000)- $2,500 = $0. Since the expected value of this gamble is zero, it is a fair gamble.

Obi-Wan Is Considering Whether to Buy a Lightsaber