Consider the following utility function: b U(W) = W ---W 2 Given that your wealth is W= ZMW1,000 and you face a gamble: G (ZMW100, - ZMW100: 50) with 50% probability you win ZMW 100 and 50% probability lose ZMW100

Economics Nov 04, 2020

Consider the following utility function: b U(W) = W ---W 2 Given that your wealth is W= ZMW1,000 and you face a gamble: G (ZMW100, - ZMW100: 50) with 50% probability you win ZMW 100 and 50% probability lose ZMW100. Answer the following a) Is this a fair game? [5 Marks]

Expert Solution

A game is fair when all the options have an equal probability, that is the probability of winning is same as probability of losing, especially when amount to win or lose is same.

In the given case, the same amount of ZMW 100 has winning probability same as losing probability, that is 50%.

Thus, this is a fair game.

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