Figure 9-2. The figure shows a utility function for Mary Ann.

-Refer to Figure 9-2. Suppose Mary Ann begins with $1,050 in wealth. Which of the following coin-flip bets would she definitely not be willing to accept?
A) If it is "heads," she wins $100; if it is tails, she loses $95.
B) If it is "heads," she wins $150; if it is tails, she loses $150.
C) If it is "heads," she wins $150; if it is tails, she loses $140.
D) She definitely would not accept any of these bets.

Question

Figure 9-2. The figure shows a utility function for Mary Ann.
 
-Refer to Figure 9-2. Suppose Mary Ann begins with $1,050 in wealth. Which of the following coin-flip bets would she definitely not be willing to accept?
A) If it is "heads," she wins $100; if it is tails, she loses $95. 
B) If it is "heads," she wins $150; if it is tails, she loses $150. 
C) If it is "heads," she wins $150; if it is tails, she loses $140. 
D) She definitely would not accept any of these bets.

Quizplus · Accepted Answer

Mary Ann's utility function exhibits risk aversion. Since she begins with $1,050 in wealth, she is risk-averse towards all bets that could result in losing money. In option B, if it is tails, she loses $150, which is a significant amount for her. Therefore, she would not be willing to accept this bet.