Consider the Following Scenario When Answering the Following Questions

question 121

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.
-A student who is risk neutral would choose Gamble B,which has an expected value of ________,over Gamble A,which has an expected value of ________.

• A) $1.39 million; $1 million
• B) $1 million; $1.42 million
• C) $0.89 million; $1 million
• D) $1 million; $0.89 million
• E) $1.10 million; $1 million

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Definitions:

Economies Of Scale

Cost savings that accrue to firms from upscaling their production operations, where there's a typical decrease in the cost per unit with larger production volumes.

Average Cost

The sum of all production expenses divided by the quantity of items made, showing the expense for each unit of product.

Purely Competitive Equilibrium

A market state characterized by a perfect match between supply and demand, resulting in an optimal distribution of resources without any single buyer or seller influencing the price.

Monopoly Equilibrium

The price and output level determined in a market where a single seller controls the entire supply of a good or service.