Richard is deciding whether to buy a state lottery ticket. Each ticket costs $1, and the probability of winning payoffs is given as follows:
Probability Return
0.50 ……………….. $0.00
0.25 ……………….. $1.00
0.20 ……………….. $2.00
0.05 ……………….. $7.50
a) What is the expected value of Richard’s payoff if he buys a lottery ticket? What is the variance?
b) Richard’s nickname is “No-Risk Rick” because he is an extremely risk-averse individual. Would he buy the ticket?
c) Richard has been given 1000 lottery tickets. Discuss how you would determine the smallest amount for which he would be willing to sell all 1000 tickets.
d) In the long run, given the price of the lottery tickets and the probability/return table, what do you think the state would do about the lottery?