Suppose You Have Won $1,000 on a Game Show

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The Answer is The final wealth levels for the two alternatives are not different. In both cases, the expected value of the gambles is the same.

For Alternative 1:
- Gamble A: Win $1000 with 0.50 probability
- Gamble B: Win $500 for sure

The expected value of Gamble A is 0.50 * $1000 = $500. So, on average, you would win $500 with Gamble A.
The expected value of Gamble B is simply $500. So, on average, you would win $500 with Gamble B.

For Alternative 2:
- Gamble C: Lose $1000 with 0.50 probability
- Gamble D: Lose $500 for sure

The expected value of Gamble C is 0.50 * (-$1000) = -$500. So, on average, you would lose $500 with Gamble C.
The expected value of Gamble D is simply (-$500). So, on average, you would lose $500 with Gamble D.

Since the expected values are the same for both alternatives, the final wealth levels are not different.

However, people may choose Gamble B over Gamble A in Alternative 1 because they are risk-averse. Even though the expected value is the same, the uncertainty of winning $1000 with 0.50 probability may be less appealing than the certainty of winning $500.

Similarly, people may choose Gamble C over Gamble D in Alternative 2 because they are risk-seeking. Even though the expected value is the same, the uncertainty of losing $1000 with 0.50 probability may be more appealing than the certainty of losing $500.

In both cases, people's risk preferences drive their choices, even though the final wealth levels are not different.

Suppose You Have Won $1,000 on a Game Show

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Correct Answer:
Answered by ExamLex AI

Suppose You Have Won $1,000 on a Game Show

Essay

Correct Answer:Answered by ExamLex AIShow Answer

Correct Answer:
Answered by ExamLex AI