An individual has a certainty equivalent coefficient equal to 0.40. What is the most this individual would pay to play a game that pays $50 or $30 with equal probability?
A) $16
B) $32
C) $40
D) $100

Question

Quizplus · Accepted Answer

The expected value of the game is (0.5 * $50) + (0.5 * $30) = $40. The certainty equivalent is 0.40 * $40 = $16, which is the most the individual would pay to play the game.

An Individual Has a Certainty Equivalent Coefficient Equal to 0