Connie's utility depends upon her income. Her utility function is U = I1/2. She has received a prize that depends on the roll of a pair of dice. If she rolls a 3, 4, 6 or 8, she will receive $400. Otherwise she will receive $100.
- What is the expected payoff from this prize? [Hint: The probability of rolling a 3 is 1/18, the probability of rolling a 4 is 3/36, the probability of rolling a 6 is 5/36, and the probability of rolling an 8 is 5/36]
- What is the expected utility from this prize?
- Connie is offered an alternate prize of $169 (no dice roll is required). Will she accept the alternate prize or roll the dice?
- What is the minimum payment that Connie will accept to forego the roll of the dice?