Piku faces a lottery with outcomes of ₹24, ₹12, ₹48 and ₹6 given by the following probability distribution:
She is indifferent between the lottery and receiving ₹28 with certainty. Given the information we can conclude that Piku is a
Piku faces a lottery with outcomes of ₹24, ₹12, ₹48 and ₹6 given by the following probability distribution:
She is indifferent between the lottery and receiving ₹28 with certainty. Given the information we can conclude that Piku is a
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- risk lover
- risk averse
- risk neutral
- hedger
The Correct Option is A
Solution and Explanation
To determine whether Piku is a risk lover, risk averse, or risk neutral, we calculate the expected value of the lottery and compare it to the certain amount of ₹28.
The expected value (EV) of the lottery is calculated as: \[ \text{EV} = \left( \frac{2}{6} \times 24 \right) + \left( \frac{3}{6} \times 12 \right) + \left( \frac{1}{6} \times 48 \right) = 8 + 6 + 8 = 22. \] Since Piku is indifferent between the lottery and receiving ₹28 with certainty, and ₹28 is greater than the expected value of ₹22, Piku prefers a certain amount of ₹28 over the lottery, implying that she is a risk lover. This is because a risk lover prefers a lottery with uncertain outcomes, even when the expected value is lower than a guaranteed amount.
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