What is the expected utility of a lottery ticket

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Question 1: Assuming that $1 is one unit of utility, what is the expected utility of a lottery ticket that costs $2 and buys a 1 in a million chance at winning a million dollars?

(positive numbers are gains, negative numbers are losses)

Question 2: Imagine that among all minor league baseball teams, Barry likes the Lansing Lugnuts more than the Durham Bulls, and likes the Savannah Bananas more than the Lansing Lugnuts. If Barry likes the Durham Bulls more than the Savannah Bananas, how could Barry be taken advantage of by a minor league baseball salesperson?

Question 3: Imagine your friend gives you their last $100 and gives you the task of purchasing their life-sustaining medicine that costs $100. You have no money of your own at the moment. While on the way to the pharmacy, you notice some people playing three-card monte with a $100 buy-in. You know the tricks involved in the game and know that you can win 3 out of every 4 times. A loss would lose the $100, but a win would pay $200. Should you play? Utilize what you know of rational choice theory to justify your answer.

Reference no: EM133456777

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