Question

Musashi and Rina are friends who are attending a “casino night” at a charity fundraiser. Once inside, there's a table at which you can gamble. For $50, you can flip a coin. If it comes up heads, you get $100 back, for a gain of $50. If it comes up tails, you get $0 back, for a loss of -$50. For all parts of this question, assume that, if you are indifferent between taking the gamble and not taking it, you will take the gamble.Is this game a better-than-fair gamble, a fair gamble or a fair gamble?

Suppose Rina decides not to take the gamble. Can you conclude from this that she is risk neutral? Yes/ No

Suppose Musashi decides to take the gamble. Suppose a different table offers another $50 coin flip where heads pays $100 and tails pays $10. Can you conclude that he would also accept this gamble? No/ Yes

Answer 1

1) it is a less than fair gamble because expected value is less than the price charged to play the gamble.

Expected value= 1/2* (100-50)+1/2(-50)=0

2) Rina is risk averse because if she was risk neutral or risk loving she would've played the gamble, according to information in the question.

3) again the expected return are less than the cost of gamble. Since Musashi has taken the previous gamble Which shows he is a risk loving person because expected return was less than the cost implies he will also take this gamble.( Here again expected return is less than the cost)