Question: Suppose a person must accept one of three bets: Bet 1: Win $100 with probability ; lose $100 with probability . Bet 2: Win $100

Suppose a person must accept one of three bets:

Bet 1: Win $100 with probability ½; lose $100 with probability ½.

Bet 2: Win $100 with probability ¾; lose $300 with probability ¼.

Bet 3: Win $100 with probability 9/10; lose $900 with probability 1/10.

a. Show that all of these are fair bets.

b. Graph each bet on a utility of income curve similar to Figure.


Suppose a person must accept one of three bets: Bet


c. Explain carefully which bet will be preferred and why.
 


Utility U3 U2 20 30 3335 40 50 Income (thousands of dollars)

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