Clancy has $1,200.He plans to bet on a boxing match between Sullivan and Flanagan.For $4, he can buy a coupon that pays $10 if Sullivan wins and nothing otherwise.For $6 he can buy a coupon that will pay $10 if Flanagan wins and nothing otherwise.Clancy doesn't agree with these odds.He thinks that the two fighters each have a probability of 1/2 of winning.If he is an expected utility maximizer who tries to maximize the expected value of lnW, where lnW is the natural log of his wealth, it would be rational for him to buy
A)50 Sullivan coupons and no Flanagan coupons.
B)100 Sullivan coupons and no Flanagan coupons.
C)50 Flanagan coupons and no Sullivan coupons.
D)100 Flanagan coupons and no Sullivan coupons.
E)100 of each kind of coupon.

Question

Quizplus · Accepted Answer

Clancy believes both fighters have an equal chance of winning, so he should buy coupons that maximize his expected utility. Buying 50 Sullivan coupons costs $200, leaving him with $1,000. If Sullivan wins, he gets $500, resulting in a wealth of $1,500. If Sullivan loses, he has $1,000. The expected utility is maximized with this strategy.

Clancy Has $1,200