Suppose That Rick Is Fortunate Enough to Receive a Gift

question 3

Essay

Suppose that Rick is fortunate enough to receive a gift from a family member of $5,000, which he may use as he does see fit. Rick is then offered a chance to receive an additional $2,000 with certainty, or a 50-50 chance of either $5,000 or $0.
(a) Which would Rick accept?
(b) Suppose instead that Rick has $10,000 in a bank account. He must now choose between
paying $3,000 with certainty or taking a 50-50 chance of loss of either $0 or $5,000. Which would Rick choose?
(c) Were Rick’s choices consistent? Explain why or why not.

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Definitions:

Substitutes Available

Other products or services that can be used in place of a particular good or service.

Inelastic

A demand or supply that is not significantly altered by changes in price.

Demand

The amount of a product or service buyers are prepared and can afford to buy at different price levels within a given timeframe.

Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change in the price of that good, expressed as a percentage change.