Consider two real estate investors, Mr. Abbott and Mr. Costello, each of whom is considering the purchase of an equity share in a new 150 story condominium tower planned for the southeast corner of Dundas and Yonge. Mr. Abbott has been teased since childhood for being perpetually timid (risk- averse) when deciding between two uncertain alternatives while Mr. Costello has long been admired for being so bold (risk-loving) in the analogous circumstances. While loitering at this location, both men see an individual, so scruffy he could only be a Ryerson business professor, offering passers-by the chance to partake in a "purely recreational" game of chance. Upon inquiring about the game, the professor tells Abbott and Costello that he will offer the following alternatives to anyone who poses with him for a selfie. Should someone do so, he will give them the choice of accepting $25.00 with certainty or betting on a toss of a coin he happens to be holding. The terms of the bet are that, once flipped, should the coin display heads, the professor will pay the person playing the lottery $100.00 but should the coin display tails that person must pay the professor $50.00. Both men, being entrepreneurs, take him up on posing with him for a photograph.

a. If the professor's coin is "fair," (that is, the probability of heads being 1/2), would either Abbott or Costello choose the certain payment of $25.00 rather than gamble on the coin toss? Would either choose the gamble rather than the certain $25.00? If their choices are different, identify who would accept the certain payment and who would choose the lottery.

b. If either Abbott or Costello chooses the lottery rather than receive the $25.00 with certainty, how much would he pay to eliminate the ensuing risk?

c. Would you ever observe either Abbott or Costello choosing to eliminate the risk from the stage two lottery? If so, who is it? How much would he pay?