Janet's broad attitude to risk (risk averse, risk neutral, or risk loving) is independent of her wealth. She has initial wealth w and is offered the opportunity to buy a lottery ticket. If she buys it, her final wealth will be either w + 4 or w – 2, each equally likely. She is indifferent between buying the ticket and not buying it. Janet offers her friend Sam (who has identical preferences and initial wealth) the following proposition: They buy the ticket together, and share the cost and proceeds equally. Sam has another idea: They buy two tickets (that have independent outcomes) and share the costs and proceeds equally. Which of the following statements is true? O a. There are risk averse expected utility maximisers who would prefer Janet's idea to Sam's idea. O b. Any expected utility maximiser whose utility is a strictly increasing function of wealth would prefer Sam's idea to Janet's idea. O c. Any risk averse expected utility maximiser would prefer Sam's idea to Janet's idea. O d. Any expected utility maximiser would be indifferent between Janet's idea and Sam's idea.

Janet's broad attitude to risk (risk averse, risk neutral, or risk loving) is independent of her wealth. She has initial wealth w and is offered the opportunity to buy a lottery ticket. If she buys it, her final wealth will be either w + 4 or w – 2, each equally likely. She is indifferent between buying the ticket and not buying it. Janet offers her friend Sam (who has identical preferences and initial wealth) the following proposition: They buy the ticket together, and share the cost and proceeds equally. Sam has another idea: They buy two tickets (that have independent outcomes) and share the costs and proceeds equally. Which of the following statements is true? O a. There are risk averse expected utility maximisers who would prefer Janet's idea to Sam's idea. O b. Any expected utility maximiser whose utility is a strictly increasing function of wealth would prefer Sam's idea to Janet's idea. O c. Any risk averse expected utility maximiser would prefer Sam's idea to Janet's idea. O d. Any expected utility maximiser would be indifferent between Janet's idea and Sam's idea.

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter9: The Basic Tools Of Finance

Section: Chapter Questions

Problem 9PA

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