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Wednesday, February 2, 2011

Game theory problem-expected value approach and expected utility approach - Lottery Ticket

Solution is available here for U$1.00

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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