WEEK 7, (October 7, 2020)
Chapter 12: the Economics of Information
Assignment:
Problem: 2, Page 401
2. For each of the following scenarios, determine whether the decision maker is risk neutral, risk averse,
or risk loving.
a. A manager prefers a 20 percent chance of receiving $1,400 and an 80 percent chance of receiving
$500 to receiving $680 for sure.
From the textbook pp 373 the mean (expected value) is given by:
q1 = 20%, q2 = 80%, x1 = $1,400, x2 = $500
E[x] = 0.2 * 1,400 + 0.80 * 500
= 280 + 400
= $680
