Question

In: Economics

Risky Rick loves gambling. His favorite gambling activity is going to the horse tracks and betting...

Risky Rick loves gambling. His favorite gambling activity is going to the horse tracks and betting on his favorite horse, Rosemary. Risky Rick’s weekly income is $100, which he takes to the tracks. Risky Rick can only purchase $50 lottery tickets on Rosemary finishing 1st. Rosemary’s probability of winning each race is .5 and in case of a victory Risky Rick gets $100 per every ticket bought while he gets nothing when Rosemary doesn’t end up in the first place.
1. (1 point) Suppose that Risky Rick can only bet multiples of $50. Calculate the expected value of buying (i) no tickets, (ii) 1 ticket, and (iii) 2 tickets. Don’t forget to take into account that he has an initial wealth of $100. Is the reward of any of the options more worthy than the other?
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3. (2 points) Suppose Risky Rick’s family wants to stop him from going to the horse tracks. They want to design a conditional cash transfer program in which Risky Rick receives a weekly allowance with the condition of not going to the horse tracks. How much should this allowance be to convince Risky Rick not to buy 2 tickets each week?
2. (1 point) Risky Rick’s utility function is u(x) = x . Find his expected utility from buying (i) no tickets, (ii) 1 ticket, and (iii) 2 tickets. How many tickets will he buy?

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