Expected utility approach
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In a certain state lottery, a lottery ticket cost $6. In terms of the decision to purchase or not to purchase a lottery ticket, suppose that the following payoff table applies:
State of nature
Decision alternative Wins s1 Lose s2
Purchase lottery ticket d1 250,000 -6
Do not purchase lottery ticket d2 0 0
1. A realistic estimate of the chances of winning are 1 in 300,000. Use the expected value approach to recommend a decision.
2. If a particular decision maker assigns an indifference probability of 0.00004 to the $0 payoff, would this individual purchase a lottery ticket? Use the expected utility to justify your answer.
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Solution Summary
The solution examines the expected utility approach. A realistic estimate of the chances of winning are given.
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In a certain state lottery, a lottery ticket cost $6. In terms of the decision to purchase or not to purchase a lottery ticket, suppose that the following payoff table applies:
State of nature
Decision alternative Wins s1 Lose s2
Purchase lottery ticket d1 250,000 -6
Do not purchase lottery ticket ...
Purchase this Solution
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