Suppose that, in an experimental setting, 100 students are presented with two situations involving risk and return. The students are first asked to choose between Gamble A and Gamble B, where:
Gamble A: The student will receive $1 million with a 100% probability.
Gamble B: The student will receive $1 million with an 89% probability, $5 million with a 10% probability, and $0 million (nothing) with a 1% probability.
The students are then asked to choose between Gamble C and Gamble D, where:
Gamble C: The student will receive $5 million with a 10% probability.
Gamble D: The student will receive $1 million with a 11% probability.
-According to the standard economic model (expected utility theory) , a student who is risk neutral would choose:
A) Gambles A and D because they both have higher expected values than B and C, respectively.
B) Gambles A and C because they both have higher expected values than B and D, respectively
C) Gambles B and C because they both have higher expected values than A and D, respectively.,
D) Gambles B and D because they both have higher expected values than A and C, respectively..
E) Gambles B and C because they both have higher expected values than A and D, respectively.
Correct Answer:
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