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 =  __________

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Chapter1: Combinatorial Analysis
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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 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 =  __________

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