A risk-neutral individual is offered a gamble that promises a gain of $1000 with probability 0.25 and a loss of $300 with probability 0.75.Given this situation,he or she will:
A)definitely take the gamble.
B)definitely not take the gamble.
C)definitely take the gamble if his or her income is high enough.
D)take an action that cannot be determined given the information available.

Question

A risk-neutral individual is offered a gamble that promises a gain of $1000 with probability 0.25 and a loss of $300 with probability 0.75.Given this situation,he or she will:​
A)​definitely take the gamble.
B)​definitely not take the gamble.
C)​definitely take the gamble if his or her income is high enough.
D)​take an action that cannot be determined given the information available.

Quizplus · Accepted Answer

Since the individual is risk-neutral, he or she only looks at the expected value of the gamble, which is:

(0.25 x $1000) + (0.75 x -$300) = $175

Since the expected value is positive, the individual would take the gamble.

A Risk-Neutral Individual Is Offered a Gamble That Promises a Gain