Question
An investor has an opportunity to play a lottery that depends on the outcome of flipping two fair coins. If both coins come up tails,
An investor has an opportunity to play a lottery that depends on the outcome of flipping two fair coins. If both coins come up tails, the lottery payoff is $0. If one coin comes up heads and the other tails, the lottery payoff is $5. If both coins come up heads, the lottery payoff is $10.
a. Calculate the probability associated with each payoff. What is the expected value of the lottery?
b. What is the maximum amount that a risk-neutral investor would agree to pay for participation in the lottery?
c. What is the maximum amount that an infinitely risk-averse investor would agree to pay for participation in the lottery?
d. What is the maximum amount that a CRRA utility investor with $10 of initial wealth and gamma=3 would agree to pay for participation in the lottery?
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Crowdfunding Personal Expenses
Authors: Salvador Briggman
1st Edition
1533254338, 978-1533254337
