a. Find the value for p that makes you indifferent between
Lottery 1 Win $1,000 with probability p
Win $0 with probability 1 – p
And
Lottery 2 Win $400 for sure
b. Now find the q that makes you indifferent between
Lottery 3 Win $400 with probability 0.50
Win $0 with probability 0.50
And
Lottery 4 Win $1,000 with probability q
Win $0 with probability 1 – q
c. According to your assessment in part a, U ($400) = p. In part b, U ($400) = 2 q. Explain why this is the case.
d. To be consistent, your assessments should be such that p = 2 q. Were your assessments consistent? Would you change them? Which assessment do you feel most confident about? Why?