5. USAEO Behavioral and Applied Economics
Risk And Uncertainty — Quiz
Test your understanding of risk and uncertainty with 5 practice questions.
Practice Questions
Question 1
A decision-maker is considering two projects. Project A has a 50% chance of yielding a profit of $100,000 and a 50% chance of yielding a loss of $40,000. Project B has a guaranteed profit of $20,000. Which project has the higher expected value?
Question 2
An individual faces a gamble where they have a 30% chance of winning $10,000 and a 70% chance of losing $4,000. If the individual is risk-neutral, what decision would they make regarding this gamble?
Question 3
A person has the following utility function for wealth: $U(W) = \sqrt{W}$. Their current wealth is $100,000. They are offered a gamble where they have a 50% chance of gaining $50,000 and a 50% chance of losing $30,000. Should they accept the gamble if they are risk-averse?
Question 4
Which of the following statements best describes a risk-averse individual’s attitude towards expected value gambles?
Question 5
A fair coin is flipped twice. If the person gets two heads, they receive $1,000. If they get any other outcome, they receive nothing. What is the expected value of this gamble?