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:

Raw Materials Inventory

The total cost of all the components that will be used in the production of goods but have not yet been used.

Days' Sales

A financial metric measuring the number of days it takes for a company to convert its inventory into sales.

Raw Materials Used

The basic substances in their natural, modified, or semi-processed state used as inputs for production.

Average Inventory

The mean value of inventory within a certain period, calculated by adding the beginning inventory and ending inventory and dividing by two.