Suppose That, in an Experimental Setting, 100 Students Are Presented

question 94

Multiple Choice

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% probability.
Gamble B: The student will receive $1 million with an 89% probability, $5 million with a 10% probability, and $0 million (nothing) with a 1% 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% probability.
Gamble D: The student will receive $1 million with a 11% probability.

-According to the standard economic model (expected utility theory) , a student who is risk neutral would choose:

• A) Gambles A and D because they both have higher expected values than 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:

Worksheet

A worksheet is a document or a digital spreadsheet used for organizing, calculating, and analyzing data, especially for tasks involving financial information or planning.

Unpaid Wages

Amounts due to employees for work performed that have not yet been paid by the employer, representing a liability for the company.

Overstatement

The act of reporting financial data more positively than is accurate, leading to a portrayal of a stronger financial position.

Understatement

A representation of financial position or results of operations that is less than what is true, factual, or proper, often leading to a misleading view of a company's financial health.