Consider the Following Scenario When Answering the Following Questions

question 68

Multiple Choice

Consider the following scenario when answering the following questions:
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 percent probability.

Gamble B: The student will receive $1 million with an 89 percent probability,$5 million with a 10 percent probability,and $0 million (nothing) with a 1 percent 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 percent probability.

Gamble D: The student will receive $1 million with an 11 percent 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 higher expected values than A and D,respectively

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Definitions:

Income Statement

A financial statement that shows a company’s revenues and expenses over a specific period, ending with net income or loss.

Adjusted Trial Balance

A list of all accounts and their balances after adjustments are made, used to verify the balance of debits and credits.

Net Income

The total profit of a company after all revenues and gains are added to the account and all expenses and losses are subtracted.

Income Statement

A financial statement that shows a company's revenues and expenses over a specific period, revealing profit or loss.