Brandon's certainty equivalent given the information in problem 25 is
A) 250
B) 306.25
C) 18.75
D) 17.5

Question

Quizplus · Accepted Answer

To calculate the certainty equivalent, we need to find the amount of money that Brandon would prefer to receive for sure rather than taking the gamble. From problem 25, we know that Brandon is risk-averse and therefore prefers certainty over uncertainty.

Using the formula for the expected value of the gamble, we get:

0.5($500) + 0.5($100) = $300

Therefore, the certainty equivalent is $306.25, which is the amount of money that Brandon would prefer to receive for sure rather than taking the gamble.

Brandon's Certainty Equivalent Given the Information in Problem 25 Is