Problem: In a certain state lottery, a lottery ticket cost $6. In terms of the decision to purchase or not to purchase a lottery ticket, suppose that the following payoff table applies:
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State of nature
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Decision alternative
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Wins s1
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Lose s2
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Purchase lottery ticket d1
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250,000
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-6
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Do not purchase lottery ticket d2
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0
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0
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Question 1. A realistic estimate of the chances of winning are 1 in 300,000. Use the expected value approach to recommend a decision.
Question 2. If a particular decision maker assigns an indifference probability of 0.00004 to the $0 payoff, would this individual purchase a lottery ticket? Use the expected utility to justify your answer.