Marge is contemplating the purchase of a high stakes Springfield Lottery ticket. The ticket would cost her
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Question:
Marge is contemplating the purchase of a high stakes Springfield Lottery ticket. The ticket would cost her $5,000. There’s a 50 percent chance she’ll win $10,000 (and a 50 percent chance she’ll “win” $0).
- What is the expected value of the lottery?
- Graph Marge’s Bernoulli utility function u(c) = C1/3 . Is she risk averse? What is the expected utility of the lottery?
- Find the certainty equivalent.
- Should Marge purchase the ticket? What if her Bernoulli utility were u(c) = c? What if it were u(c) = C3?
Related Book For
College Accounting
ISBN: 978-1111528126
11th edition
Authors: Tracie Nobles, Cathy Scott, Douglas McQuaig, Patricia Bille
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