Suppose that you are deciding whether to buy a $1 lottery ticket. The jackpot is 1.2 million and there is a 1/1,000,000 chance of winning.

What is the expected value of buying the ticket and of not buying the ticket?

What decision should you make according to the expected value decision rule?

Create a strategy table showing how the optimal decision would change as the jackpot varies from $800,000 to $1,400,000 in $100,000 increments.

2. You have just learned that the jackpot will be paid in increments rather than one lump sum. At the end of each of the next 10 years, the winner will receive a payment of $120,000. The interest rate is 6% per year.

What is the present value of the jackpot (i.e., today)?

What is the expected value of buying the ticket (using present value)?

What decision should you make according to the expected value decision rule (using present value)?

(For simplicity, work only with full years. If it will make it easier for you to think about this problem, assume today is January 1, 2018. You would receive your first payment in exactly one year and last payment in exactly 10 years.)