Author Question: Suppose you are offered a gamble in which you win 1,000 1/3 half the time but lose 800 2/3 half the ... (Read 89 times)

rachel9 · **on:** Jun 30, 2018

Suppose you are offered a gamble in which you win 1,000 1/3 half the time but lose 800 2/3 half the time. If you are risk lover will you take the gamble? What will your expected payoff be?

What will be an ideal response?

Question 2

Using an equation, explain why governments prefer to avoid excessive current account surpluses?

What will be an ideal response?

akpaschal · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

The expected payoff would be:
1/3 (+1,000 ) + 2/3 (-800 ) = -200.
From this calculation, we know that risk-neutral individuals would not take the gamble, but it is not clear what a risk-loving individual would do.

Answer to Question 2

This follows from the national income identity, S = CA + I, which says that total domestic savings, S, is divided between foreign asset accumulation, CA, and domestic investment, I.