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Suppose he faces the following scenario. He can keep his current level of income or he can take the following gamble: with probability equal to 91/218 he wins $127 or with probability equal to 127/218 he loses $91. Please answer the following questions: 1. Is this a fair gamble? Please provide support for your assertion. 2. Will Fin opt for the gamble? Provide support for your assertion. 3. If Fin were forced to take the gamble, then determine the maximum amount that he would be willing to pay to avoid the gamble?

Suppose he faces the following scenario. He can keep his current level of income or he can take the following gamble: with probability equal to 91/218 he wins $127 or with probability equal to 127/218 he loses $91. Please answer the following questions: 1. Is this a fair gamble? Please provide support for your assertion. 2. Will Fin opt for the gamble? Provide support for your assertion. 3. If Fin were forced to take the gamble, then determine the maximum amount that he would be willing to pay to avoid the gamble?

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Fin has $216 dollars in income and has the following preferences over income: U(1) = i Suppose he faces the following scenario. He can keep his current level of income or he can take the following gamble: with probability equal to 91/218 he wins $127 or with probability equal to 127/218 he loses $91. Please answer the following questions: 1. Is this a fair gamble? Please provide support for your assertion. 2. Will Fin opt for the gamble? Provide support for your assertion. 3. If Fin were forced to take the gamble, then determine the maximum amount that he would be willing to pay to avoid the gamble?
Transcribed Image Text:Fin has $216 dollars in income and has the following preferences over income: U(1) = i Suppose he faces the following scenario. He can keep his current level of income or he can take the following gamble: with probability equal to 91/218 he wins $127 or with probability equal to 127/218 he loses $91. Please answer the following questions: 1. Is this a fair gamble? Please provide support for your assertion. 2. Will Fin opt for the gamble? Provide support for your assertion. 3. If Fin were forced to take the gamble, then determine the maximum amount that he would be willing to pay to avoid the gamble?
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