Question
There are two lottery tickets: A and B. Lottery ticket A's payoff is uniformly distributed between $400-$600. Lottery ticket B's payoff is normally distributed with
There are two lottery tickets: A and B. Lottery ticket A's payoff is uniformly distributed between $400-$600. Lottery ticket B's payoff is normally distributed with a mean of $550 and standard deviation $200. The rules are simple. Reveal lottery ticket A's payoff. Decide whether to keep the payoff or give it up. If you keep the payoff, then you receive that amount and the game ends. If you give up the payoff, then you get to reveal the other ticket's payoff and you receive the revealed amount instead. You want to maximize the expected payoff subject to having no more than a 20% chance of receiving less than $450. What is your optimal strategy?
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