Timmy Qualm's uncle gave him a lottery ticket. With probability the ticket will be worth $100 and with probability it will be worthless. Let x be Timmy's wealth if the lottery ticket is a winner, and y his wealth if it is a loser. Timmy's preferences over alternative contingent commodity bundles are represented by the utility function U(x, y) = min{ 2x - y, 2y - x}. He has no risks other than the ticket.
A) Timmy would sell his lottery ticket for $25 but not for less.
B) Timmy hates risk so much that he'd be willing to throw away the lottery ticket rather than worry about whether he won.
C) Timmy satisfies the expected utility hypothesis.
D) Timmy is misnamed. He is a risk lover.
E) None of the above.

Question

Timmy Qualm's uncle gave him a lottery ticket. With probability  the ticket will be worth $100 and with probability  it will be worthless. Let x be Timmy's wealth if the lottery ticket is a winner, and y his wealth if it is a loser. Timmy's preferences over alternative contingent commodity bundles are represented by the utility function U(x, y) = min{ 2x - y, 2y - x}. He has no risks other than the ticket.
A) Timmy would sell his lottery ticket for $25 but not for less. 
B) Timmy hates risk so much that he'd be willing to throw away the lottery ticket rather than worry about whether he won. 
C) Timmy satisfies the expected utility hypothesis. 
D) Timmy is misnamed. He is a risk lover. 
E) None of the above.

Quizplus · Accepted Answer

The Answer of Timmy Qualm's uncle gave him a lottery ticket. With probability  the ticket will be worth $100 and with probability  it will be worthless. Let x be Timmy's wealth if the lottery ticket is a winner, and y his wealth if it is a loser. Timmy's preferences over alternative contingent commodity bundles are represented by the utility function U(x, y) = min{ 2x - y, 2y - x}. He has no risks other than the ticket.
A) Timmy would sell his lottery ticket for $25 but not for less. 
B) Timmy hates risk so much that he'd be willing to throw away the lottery ticket rather than worry about whether he won. 
C) Timmy satisfies the expected utility hypothesis. 
D) Timmy is misnamed. He is a risk lover. 
E) None of the above.

Timmy Qualm's Uncle Gave Him a Lottery Ticket