Question

I am a rational and risk-averse person, and I have an option of making the following bet: I receive $500 cash, after which I roll a normal 6-sided die. Whatever I roll, I must pay $200 times the value of the roll of the die (so if make the bet and roll a ‘2’, I get $500, then have to pay out $400, thus I win $100 in total). 10. If my goal is to maximize my personal utility, should I accept this bet, and does my exact level risk aversion affect whether or not I should accept the bet? I should accept the bet; the precise level of my risk aversion does not matter I should not accept the bet; the precise level of my risk aversion does not matter I should not accept the bet; the precise level of my risk aversion does matter There is not enough information to determine whether I should accept the bet or not; the precise level of my risk aversion does matter

Answer 1

Answer:

I should not accept the bet; the precise level of risk aversion does matter.

Explanation:

Risk averse person is the one who is not willing to take the risk even if he is given high returns. Risk averse person will always avoid the risks. In the given scenario the person is risk averse. If he rolls out the dice he has to pay $200 times the dice number which means he just have two chance (dice rolls 1 or dice rolls 2) for getting return otherwise he will loose the bet and he will have to pay money from the pocket.