Question 1:
Who wants to play the Mahoney Lottery? Tickets cost $5 to play, and you get to pick a number between 1 and 20. If you guess right, you win $100. If you guess wrong, you win nothing. In either case, you must pay the $5 to play. What is your expected payoff if you play this game?
Question 2:
Consider the same lottery as in question 1. You have a utility function characterized by u(c)=c^(1/2). If you have just $5 before you play the game (so you have just enough to play), what will your expected utility be if you decide to play the game?
Question 3
Again, you currently have $5 and are deciding whether or not to play the Mahoney Lottery. What will your utility be if you don't play the game? Should you play?Answer
You should play
You shouldn't play
You are indifferent between playing and not playing
Question 4
You still have a utility function given by u(c)=c^(1/2), and currently have $5. If I charge $5 for a lottery ticket, how much would the prize have to be for you to be exactly indifferent between playing and not playing (using expected utility framework).