Suppose a person must accept one of three bets: Bet 1: Win $100 with probability ; lose
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Question:
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.
c. Explain carefully which bet will be preferred and why.
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