An individual is indifferent between a certain payment of $8 and a game that will pay $20 or nothing with equal probabilities. The individual has a certainty equivalent coefficient of
A) 0.40.
B) 0.50.
C) 0.80.
D) 1.25.

Question

Quizplus · Accepted Answer

The certainty equivalent coefficient is calculated as the certain amount ($8) divided by the expected value of the uncertain game. The expected value of the game is (0.5 * $20) + (0.5 * $0) = $10. Therefore, the certainty equivalent coefficient is $8 / $10 = 0.80.

An Individual Is Indifferent Between a Certain Payment of $8