Asked by Alexis Chavez on May 08, 2024
Verified
Wilma is not risk averse.She is offered a chance to pay $10 for a lottery ticket that will give her a prize of $100 with probability .06, a prize of $50 with probability .1, and no prize with probability .85.If she understands the odds and makes no mistakes in calculation, she will buy the lottery ticket.
Lottery Ticket
A slip of paper or card used to participate in a lottery game, where winners are typically selected by a random draw.
Risk Averse
A preference for certainty over uncertainty with regards to outcomes, particularly in the context of financial decisions.
Probability
A measure of the likelihood of a particular event occurring, ranging from 0 (impossible) to 1 (certain).
- Understand the concept of risk aversion and how it affects decision-making in uncertain scenarios.
- Calculate the expected value of a gamble and compare it with certain outcomes to make rational choices.
Verified Answer
JR
Janiah RigginsMay 15, 2024
Final Answer :
True
Explanation :
Since Wilma is not risk averse and the expected value of the lottery ticket is (0.06 * $100) + (0.1 * $50) + (0.85 * ($0)) - $10 = $1.90, which is positive, she will buy the lottery ticket.
Learning Objectives
- Understand the concept of risk aversion and how it affects decision-making in uncertain scenarios.
- Calculate the expected value of a gamble and compare it with certain outcomes to make rational choices.