suppose that a decision maker\'s risk attitude toward monetary gains or losses x

Question

suppose that a decision maker's risk attitude toward monetary gains or losses x given by the utility function u(x)=(10000+x)1/2. suppose that a decision maker has the opportunity to buy a lottery ticket. suppose the lottery winning is $500,000, and the chance of winning is one in ten. Suppose we are interested in figuring out the maximum price "p" that the decision maker would buy the ticket for. which equation would we have to set up in order to figure this out? a. (10000-p)1/2=(.9)(10000)1/2+(.10)(510000)1/2 b.(10000)1/2=(.9)(10000+p)1/2+(.10)(510,000+p)1/2 c. (10000+p)1/2=(.9)10000)1/2+(.10)(510,000)1/2 d. (10000)1/2=(.9)(10000-p)1/2+(.10)(510,000-p)1/2

Explanation / Answer

Here option C is correct as

the utility function is u(x) = (10000 + x)1/2

so there is 0.9 probability he will win nothing that makes his wealth only 10000 and if win the lottery, his monetary gains are $ 500000 so his total wealth would be 510000

so,

(10000 + p)1/2 = 0.9 * 100000.5 + 0.1 * 5100000.5

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

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