Microeconommics -RISK AVERSE

Assuming that you are a RISK AVERSE,

For each of the following 3 alternatives choose one of the 2 options by circling either a) or b). For each choice calculate the expected value (EV) and briefly explain

your logic. Note the amount certain is also an expected value.

1. a) $50,000 OR b) a coin single flip with a

i) 50% chance of $90,000 (Heads)

ii) 50% chance of $17,500 (Tails)

EV = $

2. a) $50,000 OR b) 10 coin flips each of which has a

i) 50% chance of $9,000 (Heads)

ii) 50% chance of $1,750 (Tails)

EV = $

3. a) $50,000 OR b) 100 coin flips each of which has a

i) 50% chance of $900 (Heads)

ii) 50% chance of $175 (Tails)

EV = $

(8 points)

You are to use the BINOMIAL CALCULATOR as an aid in making your choice in 3 above.

Sample Solution