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Suppose the local lottery offers two types of $10 tickets for sale. The rst ticket gives the buyer a 1 in 40 chance of winning
Suppose the local lottery offers two types of $10 tickets for sale. The rst ticket gives the buyer a 1 in 40 chance of winning $100 and l in 200 chance of winning $1,000. The second ticket gives the buyer a l in 40 chance of winning $100 and 1 in 200,000 chance of winning $1,000,000. . What is the expected value and house edge for each ticket? '. What is the expected utility of each ticket for a player with $20,000 of income and a player with $100,000 of income? Should you purchase either of the tickets at an income level of $20,000 or $100,000? '. If a player is a full rational expected utility maximizer and is forced to purchase one ticket or the other, which ticket should the gambler buy and why? . Suppose that prospect theory results in you implicitly overestimating the chance of winning the $1,000,000 by a factor of ten. Would this misperception lead now lead you to (mistakenly) purchase that tickets at an income level of $20,000 or $100,000? . Assuming that you properly value the chance of winning the jackpot, if you make $100,000, how much enjoyment would you have to receive from the excitement surrounding the lottery drawing to justify purchasing the ticket with the big jackpot
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