Mary's utility function is: U = ?x (cube route of x). She is faced with a lottery where she has a 50 percent chance of winning $8 and 50 percent chance of winning $64.
a. What is the expected value of the lottery?
b. What is Mary's expected utility?
c. Now Mary is given the option to accept $8 for sure instead of participating in the lottery. Which will she choose? why?
d. Why are risk preferences important for economic policy?