Question: Consider the following lottery tickets:
(a) ticket 1 gives a return of £600 with a probability of 0.03 and a zero return otherwise;
(b) ticket 2 gives a return of £100 with a probability of 0.18 and a zero return otherwise;
(c) ticket 3 gives a return of £36 with a probability of 0.5 and a zero return otherwise.
Individual A is willing to pay prices P1, P2 and P3 for tickets 1, 2 and 3 respectively. Suppose that individual A is risk averse. What can we say about the absolute and relative values of P1, P2 and P3? In what ways will the answer be different if the individual is risk neutral?