Question
You play a game that has the following payoffs: (25 pts) 35% probability of winning $1,000 35% probability of losing $1,500 30% probability of winning
You play a game that has the following payoffs: (25 pts)
35% probability of winning $1,000
35% probability of losing $1,500
30% probability of winning $550
Use the information above to answer the following questions:
a) What is the expected value of playing the game? (5 pts)
b) Would a risk neutral person play this game? Why or why not? (5 pts)
c) What level of risk tolerance (e.g. risk seeking, risk averse, risk neutral) must a person have to play this game? (5 pts)
d) How much in dollars, would a risk-averse and a risk neutral person need to be paid to play the game. Explain. (5 pts)
e) Which party has a positive risk premium for this game - the game's sponsor or the game's player? Explain. (5 pts)
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