In 2004, Ashley Revell sold all of his possessions and gambled his entire wealth of $136,000 on one spin of a roulette wheel. He bet on “Red.” If the ball landed on red, he would double his money and have $272,000; if it did not land on red, he would be penniless.
a. Suppose Revell placed his bet in a casino in Europe. In Europe, a roulette wheel has 18 black slots, 18 red slots, and one green slot (“0”). What is the expected value of his wealth if he makes this bet?
b. Suppose Revell placed his bet in a casino in the United States. In the United States, a roulette wheel has 18 black slots, 18 red slots, and two green slots (“0” and “00”). What is the expected value of his wealth if he makes this bet?
c. Suppose Revell could have somehow found a casino that has a roulette wheel with 18 black slots, 18 red slots, and no green slots. What is the expected value of his wealth if he makes this bet? Would Revell have made this bet at this casino if were risk neutral? Would he have made this bet at this casino if were risk averse?