Consider the Following Scenario to Answer the Questions That Follow

question 15

Multiple Choice

Consider the following scenario to answer the questions that follow.
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 an 11% probability.
-According to the standard economic model (expected utility theory) ,a student who is risk averse would choose:

• A) Gambles A and D because they both give the student a higher probability of winning something rather than nothing when compared to 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 lower expected values than A and D, respectively.

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