A given person is risk neutral through all relevant levels of income.This person, facing the prospect of receiving an extra $5,000 with probability 0.5 and losing $5,000 with probability 0.5, would be willing to buy:
A) more insurance to avoid the risk than if the probabilities were 0.25 and 0.75 of receiving the extra $5,000 and losing $5,000, respectively.
B) less insurance to avoid the risk than if the probabilities were 0.25 and 0.75 of receiving the extra $5,000 and losing $5,000, respectively.
C) the same amount of insurance to avoid the risk than if the probabilities were 0.25 and 0.75 of receiving the extra $5,000 and losing $5,000, respectively.
D) no insurance to avoid the risk even if the probabilities were 0.25 and 0.75 of receiving the extra $5,000 and losing $5,000, respectively.
E) up to $10,000 in insurance if the probability of loss were sufficiently high.
Correct Answer:
Verified
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