Consider the following scenario when answering the following questions:
Suppose that in an experimental setting,100 students are asked to choose between Gamble A and Gamble B,where:
Gamble A: The student will receive $50 with a 70 percent probability and $100 with a 30 percent probability.
Gamble B: The student will receive $50 with a 50 percent probability,$200 with a 25 percent probability,and $0 (nothing)with a 25 percent probability.
-How much money would a risk-neutral student be willing to pay to play this game?
A) $85
B) $75
C) $150
D) $500
E) $225

Question

Quizplus · Accepted Answer

To determine the best choice, we need to calculate the expected value of each gamble. 
For Gamble A: 
Expected value = (0.7 x $50) + (0.3 x $100) = $65

For Gamble B: 
Expected value = (0.5 x $50) + (0.25 x $200) + (0.25 x $0) = $50

Since Gamble A has a higher expected value, a risk-neutral student would choose Gamble A. 
To calculate how much they would be willing to pay to play the game, we can use the expected value of Gamble A: 
Willing to pay = Expected value of Gamble A = $65

Therefore, the answer is B.

Consider the Following Scenario When Answering the Following Questions