In a certain state lottery, a lottery ticket costs $3. In terms of the decision to purchase or not to purchase a lottery ticket, suppose that the following payoff table applies: State of Nature Win Lose Decision Alternatives s1 s2 Purchase Lottery Ticket, d1 550000 -3 Do Not Purchase Lottery Ticket, d2 0 0 a. A realistic estimate of the chances of winning is 1 in 260,000. Use the expected value approach to recommend a decision. If required, round your answer to two decimal places. If the amount is zero enter “0”. Recommended decision: Do not Purchase Lottery Ticket Expected Value = $ ____________ b. If a particular decision maker assigns an indifference probability of 0.00001 to the $0 payoff. Would this individual purchase a lottery ticket? Decision: No, Do not purchase lottery ticket Use expected utility to justify your answer. If required, round your answer to five decimal places. Expected Utility = __________
Problem 13-27 (Algorithmic)
In a certain state lottery, a lottery ticket costs $3. In terms of the decision to purchase or not to purchase a lottery ticket, suppose that the following payoff table applies:
State of Nature | ||
Win | Lose | |
Decision Alternatives | s1 | s2 |
Purchase Lottery Ticket, d1 | 550000 | -3 |
Do Not Purchase Lottery Ticket, d2 | 0 | 0 |
a. A realistic estimate of the chances of winning is 1 in 260,000. Use the
Recommended decision: Do not Purchase Lottery Ticket
Expected Value = $ ____________
b. If a particular decision maker assigns an indifference probability of 0.00001 to the $0 payoff. Would this individual purchase a lottery ticket?
Decision: No, Do not purchase lottery ticket
Use expected utility to justify your answer. If required, round your answer to five decimal places.
Expected Utility = __________
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