Gary likes to gamble.Donna offers to bet him $70 on the outcome of a boat race.If Gary's boat wins, Donna would give him $70.If Gary's boat does not win, Gary would give her $70.Gary's utility function is U(c₁, c₂, p₁, p₂)+p₁c²₁ + p₂c²₁, where p₁ and p₂ are the probabilities of events 1 and 2 and where c₁ and c₂ are his consumption if events 1 and 2 occur respectively.Gary's total wealth is currently only $80 and he believes that the probability that he will win the race is .3.

Question

Quizplus · Accepted Answer

Since Gary's total wealth is only $80 and Donna is offering a bet of $70, it is a significant amount for him. However, if he takes the bet and wins, his total wealth will increase to $150. Therefore, he would benefit from taking the bet. Also, the fact that Gary's utility function is increasing in wealth implies that increasing his wealth by winning the bet would increase his expected utility. Therefore, taking the bet would increase his expected utility.

Gary Likes to Gamble