Mel is thinking of going on a cruise. Mel values a cruise in nice weather at $2,000 and values a cruise in bad weather at $50. The probability of nice weather is 60 percent and the probability of bad weather is 40 percent. Trip insurance is sometimes available. If purchased, it allows travelers to delay the cruise until the weather is nice. The amount of money that Mel is willing to pay for trip insurance will be:
A)higher if she is risk-averse instead of risk-neutral.
B)lower if she is risk-averse instead of risk-neutral.
C)the same regardless of whether she is risk-averse or risk-neutral.
D)positive if she is risk-neutral and negative if she is risk-averse.

Question

Quizplus · Accepted Answer

If Mel is risk-averse instead of risk-neutral, then she will be willing to pay more to avoid the uncertainty about the weather.

Mel Is Thinking of Going on a Cruise