Consider two lotteries. Lottery A is such that an individual receives a prize of 1.25 units of a consumption good with 50% probability and 0.75 units of the consumption good with 50% probability. Lottery B presents the winner with a prize of 1.5 units of a consumption good with 50% probability and a prize of 0.5 units of the consumption good with 50% probability. For this specific example, which lottery o↵ers higher value (in terms of expected utility) and what is it about the shape of the utility function that yields this result?
Consider two lotteries. Lottery A is such that an individual receives a prize of 1.25 units of a consumption good with 50% probability and 0.75 units of the consumption good with 50% probability. Lottery B presents the winner with a prize of 1.5 units of a consumption good with 50% probability and a prize of 0.5 units of the consumption good with 50% probability. For this specific example, which lottery o↵ers higher value (in terms of expected utility) and what is it about the shape of the utility function that yields this result?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Consider two lotteries. Lottery A is such that an individual receives a prize of 1.25 units of a consumption good with 50% probability and 0.75 units of the consumption good with 50% probability. Lottery B presents the winner with a prize of 1.5 units of a consumption good with 50% probability and a prize of 0.5 units of the consumption good with 50% probability.
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For this specific example, which lottery o↵ers higher value (in terms of expected utility) and what is it about the shape of the utility function that yields this result?
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