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Determining Fair Price: Example Question

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1. Let's play a game. An urn contains five red, four green and one gold ball other than color, the balls are identical. You are blindfolded and allowed to pick a ball from the urn. Red pays $5, green pays $10 and gold pays $50.

A. Determine the fair price to play this game
B. Let x be the payoff variable for this game. Find e(x)
C. If the price to play this game were $5 a play, would you play? How often? Why
D. If the price to play this game were $15 a play would you play? How often ? Why?

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Solution Summary

Solution provides steps necessary to find a fair price for the game.

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a) This should be the value that makes E(payoff) - price = 0 a true statement. In other words it should be the same value as part b (assuming your text does not define 'fair ...

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