Problem
A particular consumer that I know must choose between (1) a sure payment of $200; (2) a gamble with prizes $0, $200, $450, and $1,000, with respective probabilities .5, .3, .1, and .1; (3) a gamble with prizes $0, $100, $200, and $520, each with probability 1/4. This consumer, in the context of these choices, subscribes to the von Neumann-Morgenstern axioms. Moreover, this consumer, upon reflection, is willing to state that her preferences exhibit constant absolute risk aversion over this range of prizes, and her certainty equivalent for a gamble with prizes $1,000 and $0, each equally likely, is $470. Which of the three gambles given is best for this consumer (granting the validity of all her judgments)?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.