Richard is deciding whether to buy a state lottery ticket. Each ticket costs $1, and the probability of the following winning payoffs is given as follows: Probability Return .5 $0.00 2.5 $1.00 .2 $2.00 -05 $7.50
a. What is the expected value of Richard's payoff if he buys a lottery ticket? What is the variance?
b. Richard's nickname is "No-risk Rick." He is an extremely risk-averse individual. Would he buy the ticket?
c. Suppose Richard was offered insurance against losing ally money. If he buys 1,000 lottery tickets, how much would he be willing to pay to insure his gamble?
d. In the long run, given the price of the lottery ticket and the probabilitylreturn table, what do you think the state would do about the lottery?