Question
In: Economics
Lottery – Let $1,000 be your current wealth. There are 100 people and each buys a...
Lottery – Let $1,000 be your current wealth. There are 100 people and each buys a lottery ticket at $5. The administrative cost of the lottery ticket per person is $5. If you win the lottery, you will get $500. There is only one person who can win the lottery. (The cost is 5+5 not 5)
a. Define the gamble
b. Calculate the expected value of the gamble
c. Is this gamble favorable, fair, or unfavorable?
d. Now, suppose your utility function is ? = ?5/2 . Calculate the Certainty Equivalent and the risk premium for individual willing to buy the lottery (i.e., minimum amount of money he/she needs to receive to forgo the lottery)?.
e. Now suppose that there are only 50 individuals participating in the lottery. Without calculating all the math again, what happens to risk premium? Does it increase, decrease, or stay the same?
Solutions
Rahul Sunny answered 4 hours agoRelated Solutions
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