A Given Person Is Risk Averse Through All Relevant Levels

question 32

Multiple Choice

A given person is risk averse through all relevant levels of income.This person, facing the prospect of receiving an extra $5,000 with probability 0.5 and losing $5,000 with probability 0.5, would be willing to buy:

• A)more insurance to avoid the risk than if the probabilities were 0.25 and 0.75 of receiving the extra $5,000 and losing $5,000, respectively.
• B)less insurance to avoid the risk than if the probabilities were 0.25 and 0.75 of receiving the extra $5,000 and losing $5,000, respectively.
• C)the same amount of insurance to avoid the risk as if the probabilities were 0.25 and 0.75 of receiving the extra $5,000 and losing $5,000, respectively.
• D)no insurance to avoid the risk even if the probabilities were 0.25 and 0.75 of receiving the extra $5,000 and losing $5,000, respectively.
• E)up to $10,000 in insurance if the probability of loss were sufficiently high.

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Definitions:

Bilateral Contract

An agreement between two parties where each promises to perform an act in exchange for the other's performance.

Unilateral Contract

A contract where one party makes a promise in exchange for an act by another party, becoming binding upon the performance of the act.

Past Consideration

In contract law, a benefit or service previously performed and therefore cannot serve as consideration for a current contract.

Fair Market Value

The price that property would sell for on the open market between a willing buyer and a willing seller, each having reasonable knowledge of all relevant facts.