Imagine making choices in the following situation to test the degree of risk aversion. Most people have negative feelings about bearing risk in their investment activities. Someone offers the choice between the following game and a sure thing.

The game: A coin is tossed. If it turns up heads, you get a 1,200,000 dollars. If tails, you get nothing. The sure thing: You're given $600,000.

1. What is the expected value of each option? Game: $ fill in the blank 1 Sure Thing: $ fill in the blank 2
2. Which option would be chosen? Most people would choose

   the sure thingthe gamethe sure thing

   .
3. Viewing the options as probability distributions, which has the larger variance? If the variance answer is zero, enter "0".

   the sure thingthe gamethe game

   What is the variance of the sure thing? $ fill in the blank 5
4. Suppose the game is changed to offer a payoff of $1.44 million for a head but still offers nothing for a tail. The sure thing remains $600,000. What is the expected value of each option now? Game: $ fill in the blank 6 Sure Thing: $ fill in the blank 7 Which option would be chosen? Most people would choose

   the sure thingthe gamethe sure thing

   .
5. Most people will have chosen the sure thing in part (d). Assuming you did too, how much would the games payoff have to increase before you would choose it over the sure thing? The input in the box below will not be graded, but may be reviewed and considered by your instructor.
7. Relate this exercise to figure below. Part (a) is represented in the

   leftrightleft

   panel of the diagram. Part (d) is represented in the

   leftrightright

   panel.