Reference no: EM13582582

Question: Consider two lotteries:

L1: (0.5, 1000, 0.2,500, 0.2,300, 0.1, 200)
L2: (0.6, 800, 0.1,600, 0.3, 100)

a) Using an exponential utility function with R=250 determine which lottery is preferred on the basis of expected utility.

b) Transform the utility values using a linear equation u'(x) =au(x) +b so that the largest and smallest payoffs among the two lotteries have transformed utility values of 1 and 0 respectively. Which lottery is now preferred using the transformed utility values?