Suppose the expected value of a risky transaction is $1,000 and the value of a no-risk transaction is also $1,000. What type of consumers would be willing to engage in the risky transaction?
Multiple choice question.
Risk lovers and risk averse.
Risk neutral and risk averse.
Risk lovers and risk neutral.
The correct answer is: Risk lovers and risk neutral.
Risk lovers are individuals who are willing to take on more risk in exchange for potentially higher returns. In this case, if the expected value of the risky transaction is $1,000, some risk lovers may be willing to engage in the risky transaction in the hopes of getting an outcome higher than $1,000.
Risk neutral individuals, on the other hand, do not factor in risk when making decisions. They only consider the expected value. Since the expected value of both the risky and no-risk transaction is $1,000, risk neutral consumers would be willing to engage in the risky transaction as well.
Risk averse individuals, who prefer certainty over risk, would not be willing to engage in the risky transaction as the expected value of the no-risk transaction is also $1,000.