Consider the following scenario when answering the following questions: Suppose
ID: 1128564 • Letter: C
Question
Consider the following scenario when answering the following questions:
Suppose that in an experimental setting, 100 students are asked to choose between Gamble A and Gamble B, where:
Gamble A: The student will receive $50 with a 70 percent probability and $100 with a 30 percent probability.
Gamble B: The student will receive $50 with a 50 percent probability, $200 with a 25 percent probability, and $0 (nothing) with a 25 percent probability.
How much money would a risk-neutral student be willing to pay to play this game?
A. $85
B. $75
C. $150
D. $500
E. $225
Explanation / Answer
Expected value of a game = 1/2 (EV of Gamble A)+ 1/2 (EV of Gamble B)
EV of Gamble A = 50×0.7+100*0.3 = 65
EV of Gamble B= 0.5* 50 + 0.25* 200 + 0.25*0 = 75
EV of Game = 1/2(65+75) = 70
Risk neutral player's willingness to pay is always EV of Game
Hence answer should be 70
(There may be some typo error with the options given.)