A Decision-Maker Is Faced with a Choice Between a Lottery $\sqrt { I }$

question 49

Multiple Choice

A decision-maker is faced with a choice between a lottery with a 30% chance of a payoff of $30 and a 70% chance of a payoff of $80, and a guaranteed payoff of $65. If the decision maker's utility function is U = $\sqrt { I }$ , what is the risk premium associated with this choice?

• A) $1.59
• B) $2.52
• C) $0
• D) $3.95

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Definitions:

Certificate Of Deposit

A Certificate of Deposit (CD) is a financial product offered by banks and credit unions that provides an interest rate premium in exchange for the customer agreeing to leave a lump-sum deposit untouched for a predetermined period of time.

Multiple Endorsements

Refers to the practice in banking and finance where a document, such as a check, is signed over to another party multiple times.

Liable

Being legally responsible for something, typically referring to obligations in law.

Primary Liability

The direct and immediate responsibility to fulfill an obligation or repay a debt, without necessarily having recourse against others for reimbursement.