Answer to Question #58517 in Microeconomics for Deepika sen

Question

Rita faces the choice problem between two gambles.In gamble one she wins 200 if a coin comes up head and loses 100 if the coin comes up tail. In gamble two she wins 20000 if coin comes up head and loses 10000 if coin comes tail.assuming her initial wealth w is 10000 find if a risk neutral Rita would acceor both or neither of the gambles

Answer 1

If in gamble 1 Rita wins 200 or loses 100, and in gamble 1 she wins 20000 or loses 10000, assuming her initial wealth w = 10000 , then if a risk is neutral, Rita cannot accept both gambles, because the possible loss in gamble 2 equals her total wealth w = 10000. As in both gambles the possible sum in case of win is higher, then Rita will choose one of two gambles, because the risk is neutral. I think, that Rita will choose the gamble 1, because there is no risk to lose all her wealth after the first game.