Suppose Feng have $50 and you would like to purchase some lottery tickets. Assume that he can win with 40% probability, and if he win, he can earn…

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  1. Suppose Feng have $50 and you would like to purchase some lottery tickets. Assume that he can win with 40% probability, and if he win, he can earn 100% of his investment (i.e., double the investment). On the other hand, if he lose, he loses 100% of his investment. Further assume that his utility function is given by u (w) = −w2 + 100w. Answer each of the following.
  • (a) Is Feng risk-averse, risk-neutral, or risk-loving? How do you know?
  • (b) What is the expected value of the lottery if Feng invests all $50?
  • (c) If Feng want to maximize his expected utility, how much should he invest?

 

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