Question
You have $105. Your utility function is v(c) = sqrt(c). A bag contains three coins: a 2-headed coin, a 2-tailed coin, and a normal, fair
You have $105. Your utility function is v(c) = sqrt(c). A bag contains three coins: a 2-headed coin, a 2-tailed coin, and a normal, fair coin. A coin is taken at random and you can bet on the outcome of a flip. If you are correct you will win 21 dollars, if you are wrong you will lose 51 dollars. A) Without doing any calculations, explain why you would not take this bet. B) You are given the opportunity to observe a sample of size 1 (so, one flip of the coin) for an up-front fee of $5. After observing the result you may, if you choose, bet as above. Would you pay the fee and place a bet? C) What if the fee in part B) was $10 instead of $5? D) Using the above, give an interval that contains the value to you of observing a sample of size 1. E) Would someone who is more risk-averse be willing to pay more for the information? Explain.
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