Suppose a Fair, Two-Sided Coin Is Flipped

question 20

Multiple Choice

Suppose a fair, two-sided coin is flipped. If it comes up heads you receive $5; if it comes up tails you lose $1. The variance of this lottery is

• A) 4.5
• B) 9.0
• C) 13.5
• D) 18.0

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Definitions:

Behavioral Economists

Scholars who study the effects of psychological, cognitive, emotional, cultural, and social factors on economic decisions of individuals and institutions.

Marginal Disutility

The additional dissatisfaction or negative utility gained by consuming or producing one additional unit of a good or service.

Status Quo

The existing state of affairs; in prospect theory, the current situation from which gains and losses are calculated.

Prospect Theory

A behavioral economic theory that describes how people choose between probabilistic alternatives that involve risk, where the probabilities of outcomes are uncertain.