Consider a lottery with three possible outcomes: (i) $125 is received with probability 0.2; (ii) $100 is received with probability 0.3; (iii) $50 is received with probability 0.5.
a. What is the expected value of the lottery?
b. What is the variance of the outcome?
c. What would a risk neutral person pay to play this lottery?
d. Suppose Shirley Jackson has the utility function U=ln[I], where ln is the natural log function and I is income and that she has $1000 in income. Would she play this lottery for $75? Show your work and explain.
