Consider game in which coin will be flipped three times

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Consider a game in which a coin will be flipped three times. For each heads you will be paid $100. Assume that the coin comes up heads with probability 4/5. a. Construct a table of the possibilities and probabilities in this game. Possibilities Probability Outcome 1 1 / 0 heads, 3 tails 2 / 1 head, 2 tails 3 / 2 heads, 1 tail 4 / 3 heads, 0 tails b. Compute the expected value of the game. The expected value of the game is $ . c. How much would you be willing to pay to play this game? A person who is risk averse will want to pay less than $ ; a person who is risk-neutral will be willing to pay $ . d. Consider the effect of a change in the game so that if tails comes up two times in a row, you get nothing. How would your answers to the first three parts of this question change? Possibilities Probability Outcome Payoff 1 / 3 tails, 0 heads $ 2 / tails, heads, tails $ 3 / tails, tails, heads $ 4 / heads, tails, tails $ 5 / 2 heads, 1 tails $ 6 / 3 heads, 0 tails $ Expected value = $ A person who is risk-averse will want to pay less than $ ; a person who is risk- neutral will be willing to pay $

Reference no: EM131173929

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