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Lee's utility function is U(Y) = (100 + Y) 0.5, where 100 is her initial income level and Y is additional income gained or lost from a gamble. Lee...
Ms. Lee's utility function is U(Y) = (100 + Y) 0.5, where 100 is her initial income level and Y is additional income gained or lost from a gamble. Ms. Lee can choose not to gamble or to gamble. The gamble involves the roll of a fair dice. If the number is even Ms. Lee wins $100 but if it is odd Ms. Lee loses $100.
(i) All other things held constant, what would the probability of losing have to change to so that Ms. Lee is indifferent between not gambling and gambling?
(ii) All other things held constant, what would the loss (L) amount have to change to so that Ms. Lee is indifferent between not gambling and gambling (hint: first reset the probability back to 0.5)?
