Question: Suppose that, when an individual gets dollars, we define their payoff to be in order to model their level of risk-aversion. Consider a gamble that

Suppose that, when an individual gets dollars, we define their payoff to be in order to model their level of risk-aversion. Consider a gamble that pays $1,000 with probability 0.64, and $0 with probability 0.36.

a)What is the expected value of this gamble? (1 point)

b)This individual would be indifferent between the gamble and receiving _______ with certainty, implying that they would be willing to pay up to _______ to avoid the risk associated with the gamble. (1 point)

Hint: graphing the re-scaled payoff and expected value of the gamble will really help you think through this question (see the slides).

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