exercise 2 attitudes towards risk and fair bets the following graph re
Exercise 2- Attitudes towards risk and fair bets
The following graph represents Mike's marginal utility of income (not the utility but the marginal utility):
We know that Mike's income I is greater than $20, but we do not know his exact income. Alejandro offers Mike
the following bet: Alejandro will roll a 6 sided dice (all numbers equally likely). If it is 1 or 2, Mike pays Alejandro
$20. Otherwise, if it is 3, 4,5 or 6, Alejandro pays Mike $10.
a) Is this a fair bet?
b) Will Mike accept or reject the bet? Do your answer depend on Mike's initial wealth? (assuming he can
always pay the $20 if he loses)
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