Nancy is indifferent between a gamble that pays $625 with a probability of 20% and $100 with a probability of 80%, versus a sure payment of $269. She is also indifferent between another gamble that pays $269 with a probability of 50% and $10 with a probability of 50%, versus a sure payment of $49. Let (p1, p2, p3, p4, p5: 625, 269, 100, 49, 10) represent a prospect (gamble) where p1, p2, p3, p4, and p5 represent the probabilities of the prizes $625, 269, 100, 49, and 10, respectively.
Determine whether Nancy is risk-averse, risk-loving, or risk-neutral, based on her preferences.
Rank the following four prospects according to Nancy’s preferences.
A: (0.2, 0.2, 0.2, 0.2, 0.2: 625, 269, 100, 49, 10)
B: (0.4, 0, 0, 0, 0.6: 625, 269, 100, 49, 10)
C: (0, 0.1, 0.8, 0, 0.1: 625, 269, 100, 49, 10)
D: (0, 0, 1.0, 0, 0: 625, 269, 100, 49, 10)
1 answer