1.A realistic estimate of the chances of winning are 1 in 300,000. Use the expected value approach to recommend a decision.

In a certain state lottery, a lottery ticket cost . In terms of the decision to purchase or not to purchase a lottery ticket, suppose that the following payoff table applies:

 

 

State of nature

Decision alternative

Wins s1

Lose s2

Purchase lottery ticket d1

250,000

-6

Do not purchase lottery ticket d2

 

  1. A realistic estimate of the chances of winning are 1 in 300,000. Use the expected value  approach  to recommend a decision.

 

 

  1. 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.

 

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