A person faces a lottery which involves a 50% chance of providing an extra $10,000 in income-a result which would increase utility by 10 utils.The only other possibility is that the lottery might result in a loss of $100-in which case, utility would fall by 2 utils.It is clear from the information given that this person is risk neutral.

Question

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The person is risk averse, not risk neutral. This is because the utility gain from winning ($10,000 leading to +10 utils) does not proportionally match the utility loss from losing ($100 leading to -2 utils) when considering the monetary values and probabilities involved. A risk-neutral person would have a linear relationship between money and utility, but this scenario shows a diminishing marginal utility of money, indicative of risk aversion.

A Person Faces a Lottery Which Involves a 50% Chance