A casino company offers a simple game which is described as follows: The prize of the game depends on five unbiased coins you toss. If all five heads appear, you get $650. If all five tails appear, you get $50. If exact four heads appear, you get $180. If exact four tails appear, you get $120. Otherwise, you get $150. 1. The company offers you a promotion as follows: A free cash of $150 or a chance to win the prize of the coin game. Your utility function is U(W)= -1/W. What is your choice? What is the lowest cash offer that you are willing to take it and not to play the game? 2. After the promotion period ends, the company charges the entry fee $150 for the game. One day, a group of tourists, who all exhibit utility function U(W)= -1/W, visit the casino, but no one plays the coin game. To induce them to play, the company decides to raise the payoff, instead of lowering the entry fee. What will be the smallest compensatory risk premium the company has to offer? 3. Suppose now the utility function is U=E(r)-0.5Ao². (Inputs should be in a decimal format.) The company still charges the entry fee $150 for the game. For an investor with A=0.3, will the investor prefer this coin game to an instant risk-free rate of 4%?

A casino company offers a simple game which is described as follows: The prize of the game depends on five unbiased coins you toss. If all five heads appear, you get $650. If all five tails appear, you get $50. If exact four heads appear, you get $180. If exact four tails appear, you get $120. Otherwise, you get $150. 1. The company offers you a promotion as follows: A free cash of $150 or a chance to win the prize of the coin game. Your utility function is U(W)= -1/W. What is your choice? What is the lowest cash offer that you are willing to take it and not to play the game? 2. After the promotion period ends, the company charges the entry fee $150 for the game. One day, a group of tourists, who all exhibit utility function U(W)= -1/W, visit the casino, but no one plays the coin game. To induce them to play, the company decides to raise the payoff, instead of lowering the entry fee. What will be the smallest compensatory risk premium the company has to offer? 3. Suppose now the utility function is U=E(r)-0.5Ao². (Inputs should be in a decimal format.) The company still charges the entry fee $150 for the game. For an investor with A=0.3, will the investor prefer this coin game to an instant risk-free rate of 4%?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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