Suppose Hillary was offered the following choice: Option 1 is to win $10 for sure and Option 2 is to win $20,000 with odds of 1 in 2,000 and otherwise to win nothing.If Hillary is risk averse she:
A) will choose Option 1.
B) will choose Option 2.
C) is indifferent between the two.
D) will choose Option 1 or Option 2 with equal probability.

Question

Quizplus · Accepted Answer

Risk-averse individuals prefer certain outcomes over gambles with the same expected value but some degree of uncertainty. Option 1 guarantees $10, while Option 2 has a high degree of uncertainty. Therefore, a risk-averse person like Hillary would choose the certain $10 over the gamble.

Suppose Hillary Was Offered the Following Choice: Option 1 Is