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(Solved): Assume a Person A is offered the following game: If they want to participate in the game, they will ...

Assume a Person A is offered the following game: If they want to participate in the game, they will need to pay £2. If they participate, they get to choose between Option A, which is a lottery that yields £5 with 20% change and £1 with 80% chance, and Option B, which is a lottery that yields £3 with 60% chance and 0 with 40% chance.

(i) [2 marks] What is the expected value of Option A

[2 marks] What is the expected value of Option B?

[2 marks] What is the expected value of participating in the game?

[2 marks] How much would the game need to cost to make it a fair game when youchoose Option A?

[2 marks] How much would the game need to cost to make it a fair game when youchoose Option B?

[3 marks] Person A does not want to participate in the above described game. What canbe inferred about their risk preference and the shape of their utility function? You will only receive marks for this question if you tick all correct solutions and do not tick any wrong solutions.

risk averse, concave

risk averse, convex

risk neutral, flat

risk neutral, linear

risk loving, concave

risk loving, convex

[3 marks] Person B is offered the same game, but for a price of £1. They do not want toparticipate in the game. What can be inferred about their risk preference and the shape of their utility function? You will only receive marks for this question if you tick all correct solutions and do not tick any wrong solutions.

risk averse, concave

risk averse, convex

risk neutral, flat

risk neutral, linear

risk loving, concave

risk loving, convex

[3 marks] Person C is offered the same game, for a price of £1.5. They decide to participate and choose Option B. What can be inferred about their risk preference and the shape of their utility function? You will only receive marks for this question if you tick all correct solutions and do not tick any wrong solutions.

risk averse, concave

risk averse, convex

risk neutral, flat

risk neutral, linear

risk loving, concave

risk loving, convex

[3 marks] Person D is offered the same game, for a price of £1.8. They decide are indifferent between participating in the game and not participating. What can be inferred about their risk preference and the shape of their utility function? You will only receive marks for this question if you tick all correct solutions and do not tick any wrong solutions.

risk averse, concave

risk averse, convex

risk neutral, flat

risk neutral, linear

risk loving, concave

risk loving, convex

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