Consider the following to answer the question(s) below:
A group is planning a fundraising concert. They must decide whether to hold the event indoors or out. The weather, specifically, whether or not it rains that day, will affect the amount raised by the event. The payoff table is shown below:
Action Weather Conditions

-If the group is risk averse, they should
A) plan to hold the event indoors.
B) plan to hold the event outdoors.
C) make the same decision as they would using the expected value approach.
D) decide not to hold the event at all.
E) plan to hold the event outdoors if it does not rain.

Question

Consider the following to answer the question(s) below:
A group is planning a fundraising concert. They must decide whether to hold the event indoors or out. The weather, specifically, whether or not it rains that day, will affect the amount raised by the event. The payoff table is shown below:
Action Weather Conditions
 
-If the group is risk averse, they should
A) plan to hold the event indoors. 
B) plan to hold the event outdoors. 
C) make the same decision as they would using the expected value approach. 
D) decide not to hold the event at all. 
E) plan to hold the event outdoors if it does not rain.

Quizplus · Accepted Answer

The group should choose the option that maximizes their minimum payoff because they are risk-averse. Holding the event indoors guarantees a payoff of $2,000 regardless of the weather conditions, while holding the event outdoors only guarantees a payoff of $1,000. Therefore, the group should plan to hold the event indoors to maximize their minimum payoff.

Consider the Following to Answer the Question(s) Below