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Game show deal or no deal

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Shalini is on the game show Deal or No Deal, and the box she holds has an equal probability of containing either $250,000 or $1,000,000. The "banker" gives her the choice of taking $600,000 for sure ("Deal") or gambling and taking the contents of her box ("No Deal"). Assume Shalini is an expected-utility maximizer whose utility function over game show payouts, x, is square root(x).

Are each of the following statements true or false?

1. The expected value of the monetary payoff from choosing "No Deal" is $600,000.

2. When choosing between "Deal" and "No Deal," Shalini will choose "Deal."

3. Suppose the banker offers $562,500. Then, Shalini is indifferent between "Deal" and "No Deal."

4. Shalini's risk premium for the gamble associated with "No Deal" is $62,500.

5. Suppose the banker's offer equals Shalini's certainty equivalent for the gamble associated with "No Deal," and she accepts. Then, in expectation, the show saves $62,500 relative to the scenario in which Shalini chooses "No Deal."

Reference no: EM133313982

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