Clancy has $1,200 and is an expected utility maximiser, with utility over wealth u(w) = ln(w), where ln(w) is the natural log of his wealth. He plans to bet on a boxing match between Sullivan and Flanagan. For $4, he can buy a coupon that pays $10 if Sullivan wins and nothing otherwise. For $6 he can buy a coupon that will pay $10 if Flanagan wins and nothing otherwise. Clancy doesn't agree with these odds. He thinks that the two ghters each have a probability of 1/2 of winning.
(a) What is Clancy's attitude towards risk? That is, is he risk loving, risk averse of risk neutral?
(b) If Clancy buys a coupon that pays when Sullivan wins, what is the induced lottery that he faces? What is its expected value?
(c) What if Clancy buys a coupon that pays when Flanagan wins?
(d) Will he be willing to buy both coupons?
(e) State his maximization problem and solve it.