Question

Consider the following five lottery tickets: l1 = ($100, .5; $10, .5); l2 = ($110, .5; $10, .5); l3 = ($55, 1); l4 = ($110, .5; $0, .5); l5 = ($100, .7; $10, .3). Refer to the list of lotteries in the question above. Draw two coordinate diagrams where one could draw some of those two-outcome lotteries when we consider fixed probabilities and varying prizes. In one diagram you can draw all but one of the lotteries, in the other you can draw exactly two lotteries.

(a) In each diagram specify the probability of each state and which lotteries correspond to which points in the diagram.

(b) Draw in dashed indifference curves through the lotteries for individuals who are risk neutral.

(c) Draw dotted indifference curves for a risk averse individual.

Answer 1

Hey

The answer of the following question is given below as follows

The following diagrams show possible lotteries.

to. 4 possible points are scored. Here,

1. l1 is equivalent to ($ 110, 0.45; $ 10, 0.55)

2. l3 is equivalent to ($ 110, 0.45; $ 10, 0.55)

3. l4 is equivalent to ($ 110, 0.45; $ 10, 0.55)

All with an expected prize of $ 55.

Now the 2 most possible entries are marked.

Point to be noted: That the x-axis shows the probability of getting $ 100 and the y-axis shows the probability of getting $ 10. The line segment shows the maximum probability line, that is, 1 (where the probability becomes true)

Ans.B)So secondly In the following diagrams, the straight line (indifference curve) represents lotteries for risk-neutral people.

Ans C. The diagram shows an indifference curve representing lotteries for risk-averse people.

I hope I have served the purpose well.

Thanks.