Fred is willing to pay $1 for a lottery ticket that has an expected value of zero. This proves that Fred
A) is risk averse.
B) has a certainty-equivalent coefficient that is equal to one.
C) is risk neutral.
D) None of the above is correct.

Question

Quizplus · Accepted Answer

Fred's willingness to pay $1 for a lottery ticket with an expected value of zero indicates he derives utility from the act of gambling itself, or values the entertainment or thrill it provides, rather than making a decision based purely on the expected monetary outcome. This behavior does not align with being risk averse, risk neutral, or having a certainty-equivalent coefficient equal to one, as those concepts relate to preferences over secure outcomes versus risky ones based on expected values, not on the intrinsic enjoyment of risk-taking.

Fred Is Willing to Pay $1 for a Lottery Ticket