Blanca prefers a certain income of $20,000 to a gamble with a 0.5 probability of $10,000 and a 0.5 probability of $30,000. Based on this information:

Question

Blanca prefers a certain income of $20,000 to a gamble with a 0.5 probability of $10,000 and a 0.5 probability of $30,000.  Based on this information:

BlackTom AI · Accepted Answer

First, identify the two components of Blanca's decision: a sure amount of 20,000 and a gamble offering 10,000 or 30,000 with equal probability. The expected value of the gamble is 0.5×10,000 + 0.5×30,000 = 5,000 + 15,000 = 20,000. 
Next, compare Blanca's preference: she chooses the certain 20,000 over the gamble that has the same expected value. When a person prefers a certain outcome over a risky alternative with the same expected value, this indicates risk aversion, because they prefer to avoid uncertainty even when the average payoff is the same. 
If Blanca were risk-neutral, she would be indifferent between the certain amount and the gamble with equal expected value, since both yield an EV of 20,000. If she were risk-seeking, she would prefer the gamble despite the same EV, seeking the potential higher payoff or the excitement of risk. 
Therefore, Blanca's preference demonstrates risk aversion.

Note on the provided options: the stated option is that Blanca is risk averse, which aligns with the observed preference for the sure amount over a gamble with the same expected value. In the absence of alternative options to compare, the reasoning rests on the standard definitions of risk aversion, risk neutrality, and risk seeking as they relate to comparing sure payoffs to EV-equivalent gambles.

ECON 4001.01 SP2025 (19496) Week 4 quiz

Blanca prefers a certain income of $20,000 to a gamble with a 0.5 probability of $10,000 and a 0.5 probability of $30,000. Based on this information:

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