Question

If a risk neutral consumer compares a risky lottery to a sure thing, the risk premium...

If a risk neutral consumer compares a risky lottery to a sure thing, the risk premium required to prefer the lottery is:

a. zero

b. positive

c. negative

d. depends on the particular lottery

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Answer #1

The risk level of the lottery is more to handle for a risk neutral consumer because he is not a risk seeking consumer and that is why in order to take up the lottery the risk premium would be positive because risk level of the purchase is more than the risk he could handle and that is the reason why he would prefer to offset the risk by taking a premium and that is why it would be positive

Therefore (b) positive is the answer

Cause the risk premium is positive because the customer wants to offset the risk

(a,c,d) are wrong

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