Question

1. Which of the following statements describes a risk averse individual?

a.	Her risk premium is positive

b.	Her risk premium is negative

c.	Her risk premium is zero

d.	None of the above

2. Which of the following statements describes a risk loving individual?

a.	Her certainty equivalent is greater than the expected value of the income from the chosen activity

b.	Her certainty equivalent is less than the expected value of the income from the chosen activity

c.	Her certainty equivalent is equal to the expected value of the income from the chosen activity

d.	None of the above

3. Which of the following statements describes the utility function of a risk neutral individual?

a.	Her utility function is convex

b.	Her utility function is linear

c.	Her utility function is concave

4. What determines whether an individual is willing to take on a risky activity?

a.	The risky activity itself

b.	Risk preferences

c.	Ability to ensure against risk

d.	All of the above

e.	None of the above

Answer 1

1. Option A is correct.

Risk averse is the one who wants to avoid risk and wants to limit any uncertainity, because of which the premium paid to avoid the risk is always positive.

2. Option A is correct.

When the expected income (in which risk is involved), is greater than the certain level of fixed income (risk free), involves risk in itself. Any person choosing this option is certainly risk loving.

3. Option B is correct.

Risk neutral has liner utility function.

Risk lover has convex utility function.

Risk averse has concave utility function.

4. Option D is correct.

The activity is a factor to decide upon the risk taking capabilities of an individual. The individual's risk preferences and ability to avoid it determines the willingness.