Question

Q1Which of the following statements describes a risk averse individual when faced with income from a risky activity?

1.Group of answer choices

2.Her risk premium is positive

3.Her risk premium is negative

4.None of the above

Q2Which of the following statements describes a risk loving individual when faced with income from a risky activity?

1.Her certainty equivalent is greater than the expected value of income from the risky activity

2.Her certainty equivalent is less than the expected value of income from the risky activity

3.Her certainty equivalent is equal to the expected value of income from the risky activity

4.None of the above

Q3.If the poor student was offered $1 to not play the lottery offered, what would they do?

1.Take the $1 for certain

2.Play the risky gamble

3.She is indifferent between the two options

Q4 If the rich student was offered $1 to not play the lottery offered, what would they do?

1. Take the $1 for certain

2. Play the risky gamble

3. She is indifferent between the two options

Answer 1

1. Option 2 is correct.  When an individual is risk-averse then she will go with the positive risk premium. As she doesn't want to take any kind of risk. The positive risk premium is her minimum willingness to accept compensation for the risk.

2. Option 1 is correct. The risk-loving individual will only do any risky activity if there is the possibility of getting more in return. So when her certainty is greater than the expected value of income she is likely to take the risk.

3. Option 1 is correct. The student is poor so she doesn't want to lose the money she has, to earn more. So she is not willing to take any risk and won't play the risky gamble.

4. Option 3 is correct. The student is rich, so she has a lot of money and doesn't bother about $1. In this case, there is her choice of what she wants to do. She is indifferent in playing the risky gamble.