What is the expected outcome from the gamble

Assignment Help Business Economics

Reference no: EM13887160

1. In order to boost funding for the state of Florida or Mississippi, depending on where you are, each state has decided to start a daily drawing where people can purchase a ticket for $1 with a 3-digit number from 000-999. If the number on the ticket matches the number drawn, the person wins $500. Suppose a person is risk neutral, i.e., their utility is linear in income. In this case U=Y. Show that a risk neutral person will never purchase a lottery ticket. Why then do so many people purchase these types of lottery games? (Hint: what is the Expected outcome from the gamble?)

2. Your firm has been sued for $3 million by a supplier for breach of contract. Your lawyers believe that there are three possible outcomes if the suit goes to trial. One, which the lawyers term “highly improbably,” is that your supplier will win the lawsuit and be awarded $3 million. Another, which the lawyer term “unlikely,” is that your supplier will win the lawsuit and be awarded $500,000. The third which the lawyers term “likely,” is that your supplier will lose and the lawsuit and be awarded $0. You have to decide whether to try to settle the case. To do so you need to assign probabilities to “highly improbable,” “unlikely” and “likely”. What probabilities correspond to these statements? Going to trial will cost you $100,000 in legal fees. One of your lawyers believes that your supplier will settle for $100,000 (and you will have legal fees of $25,000). Should you settle?

Reference no: EM13887160

Questions Cloud

Calculate the expected sale price of the bond : You have just purchased a five- year maturity bond for $ 10,000 par value that pays $ 610 in coupon interest annually ($ 305 every six months). You expect to hold the bond until maturity. Calculate your expected total return if you can reinvest all c..

Explain seven steps in framework for ethical decision making : Briefly explain the seven steps in the framework for ethical decision making. Provide an example of a difficult ethical decision that you have recently made

Macro variables that describe the external environment : Suppose that the economy that we are interested in modeling is not a small open economy, so that the macro variables that describe the external environment have to be treated as endogenous. What additional types of conditions do you think we would ha..

Write the equation that uses the image projection : If the camera observes a pedestrians, write the equation that uses the image projection (u, v) of a pedestrian's feet position to compute the distance d from the camera's optical-center to the pedestrian.

What is the expected outcome from the gamble : In order to boost funding for the state of Florida or Mississippi, depending on where you are, each state has decided to start a daily drawing where people can purchase a ticket for $1 with a 3-digit number from 000-999. If the number on the ticket m..

Provide a detailed description of your product assortment : Provide a detailed description of your product assortment and explain your price point strategies and how they connect with your target groups

Explain how natural monopolies cause market failure? : Explain how natural monopolies cause market failure? How is the deadweight loss associated with this form of market failure measured?

What is the effective strain : What is the effective strain, ε, caused by the rolling? What strain in a tension test (if it were possible) would cause the same amount of strain hardening?

Why professional skepticism is important in making judgments : Explain why professional skepticism is important in making professional judgments. What are the types of actions that a professionally skeptical auditor will take?

User Account

All Pages