5/3 In a certain state lottery, a lottery ticket costs $2. in terms of the decis

Question

5/3

In a certain state lottery, a lottery ticket costs $2. in terms of the decision to purchase or not purchase a lottery ticket, suppose that the following payoff table applies.

                                                                                              state of nature

decision alternatives                                  win s1                              lose s2

purchase lottery ticket d1                            300,000                           -2

Do not purchase lottery ticket d2                   0                                    0

a. A realistic estimate of the chances of winning in 1 in 250,000. Use the expected value approach to reccomend a decision

b. If a particular decision maker assigns an indifference probability of 0.000001 to the $0 payoff, would this individual purchase a lottery ticket? Use expected utility to justify your answer.

PLEASE SHOW ALL WORK

Explanation / Answer

Probability Matrix decision alternatives                                   win s1                               lose s2 purchase lottery ticket d1                          0.000004 0.999996 Do not purchase lottery ticket d2                   0.000001 0.999999 Payoff Matrix state of nature Expected Utility = pij*cij decision alternatives                                   win s1 lose s2 purchase lottery ticket d1                          300000 -2 -0.799992 Do not purchase lottery ticket d2                   0 0 0 Expected utility of the decision d1 is negative, so I recommend DO NOT purchase lottery ticker

Related Questions

Navigate

• Browse (All)
• Browse 5
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.