Chapter 5 Continued

Risk Averse

Care about risk, and if confronted with two choices with same gains, they prefer the one with lower risk

Risk Neutral

Completely ignore risk. Always accept a prospect that offers a positive expected gain.

Risk Neutral

Consumers ignore risk and decisions based off of expected gain

Risk Averse

Expect a reward for taking a risk. May decline a risky prospect even if it offers a positive expected gain.

A cumulative probability distribution of a random variable X is the probability P(X = x), where X is equal to a particular value x. True or False

False

A discrete random variable X may assume an (infinitely) uncountable number of distinct values. True or False

False

A risk-averse consumer ignores risk and makes his or her decisions solely on the basis of expected value. True or False

False

The variance of a random variable X provides us with a measure of central location of the distribution of X. True or False

False

Risk loving

May accept a risky prospect even if the expected gain is negative.

A random variable is a function that assigns numerical values to the outcomes of a random experiment. True or False

True

A risk-averse consumer may decline a risky prospect even if it offers a positive expected value. True or False

True

The expected value

of a random variable X can be referred to as the population mean.

We can think of the expected value of a random variable X as _________________________________________________________.

the long-run average of the random variable values generated over infinitely many independent repetitions