Frank McGambler needs our advice. He is thinking about a lottery ticket that gives

$100 with probability 0.5 and zero otherwise. The gamble's alternative is $40 for sure.

1. Plot the utility function, given by u (c) =c on a graph. Is Frank risk averse? Why?

2. What is the expected payoff of the lottery? (mark it on the graph).

3. What is the expected utility from the lottery? (mark it on the graph).

4. Which one should Frank chose to maximize his utility? $40 for sure or the lottery?