Suppose that, when an individual gets 𝐷 dollars, we define their payoff to be
𝐷 (2)/(3) in order to model their level of risk-aversion. Consider a gamble that pays $1,000 with probability 0.64, and $0 with probability 0.36. What is the expected value of this gamble?
𝐸[𝑔𝑎𝑚𝑏𝑙𝑒]=$?
This individual would be indifferent between the gamble and receiving $?
with certainty, implying that they would be willing to pay up to $?
to avoid the risk associated with the gamble (meaning, they would be willing to pay up to this amount to receive the expected value of the gamble with certainty).