Share
Explore BrainMass

Expected utility approach

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.

Attachments

Solution Preview

See the attached Excel file for complete solution. Thanks

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 ...

Solution Summary

The solution examines the expected utility approach. A realistic estimate of the chances of winning are given.

$2.19