Suppose you are risk averse and you are deciding between two investments. One has a guaranteed return of 5% while the second has a 50% chance of a 10% return and a 50% chance of a 0% return. Which investment would you choose? Why?

What will be an ideal response?


The second investment has an expected return of (0.5 × 10%) + (0.5 × 0%) = 5%. Since the two investments have the same expected return and you are risk averse, you choose the first investment.

Economics

You might also like to view...

The law of diminishing marginal product holds so long as the input is not a Giffen good.

Answer the following statement true (T) or false (F)

Economics

The market for used cars is shown in the above figure. Buyers cannot tell whether any given car is a lemon. The percent of all cars that are lemons is ?. What value of ? is necessary for all cars to be sold?

What will be an ideal response?

Economics

Ignoring the government and foreign sectors, there is an unplanned decrease in inventories of $200 billion at the current level of real national income of $12 trillion. From this information, we know that

A) saving equals $200 billion. B) consumption expenditures equal $12 trillion less saving less $200 billion. C) planned investment is $200 billion more than planned saving. D) planned investment is $200 billion less than planned saving.

Economics

What happens to total revenue associated with a linear demand curve as price falls?

What will be an ideal response?

Economics