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Tyler lives in Anchorage and has loss averse preferences. In particular, Tyler values a gain of...

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Basic Math

Tyler lives in Anchorage and has loss averse preferences. Inparticular, Tyler values a gain of amount x as u(x) = x^(1/2) andvalues a loss of ?x as u(?x) = ?2x 1 2

(a) What is the maximum amount of money that Tyler would pay fora lottery that pays $1000 with probability 1/2 and $0 withprobability 1/2 ?

(b) What is the maximum amount of money that Tyler would pay toavoid playing a lottery that loses $1000 with probability 1/2 andloses $0 with probability 1/ 2 ?

(c) What is the maximum amount of money that Tyler would pay toavoid playing a lottery that loses $1000 with probability 1/2 andgains $1000 with probability 1/2 ?

Answer & Explanation Solved by verified expert
4.0 Ratings (674 Votes)
Given that tyler amounts gain of x as x05 and loss of x as 2x 1 through this lottery the expected gain 1000 expected loss 0 but tylers expected gain 100005 31623 tylers expected    See Answer
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