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Compute the minimum amount of money required to sell the ticket.

1) In order to attract customers, Lau's Books Co. is considering offering a lottery to anyone who visits the bookstore. The 2 lotteries under consideration are:

Lottery A) one with a cash prize of $100 and a 10% probability of winning
Lottery B) one with cash prize of $200 and a 5% probability of winning.
Which lottery is more attractive to the consumer? describe in detail with the aid of a diagram.

2) Suppose a risk-averse person has an initial wealth of $10,000 and a utility function U(M) = ÖM. He also owns a lottery ticket. With this lottery ticket, he has a 20% chance of winning $12,500. Suppose you want this person to sell you this ticket, illustrate what is the minimum amount of money this person will ask you for? Draw a diagram to illustrate this amount.

Business Economics, Economics

  • Category:- Business Economics
  • Reference No.:- M917447

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