Problem 5 Suppose that a person won the Florida lottery and was offered a choice of two prizes: (1) A sure $500.000 (2) A coin-toss gamble in which he or she would get $1 million if a head was flipped and zero if a tail was flipped a. What is the expected dollar return on the gamble? b. Would the person choose the sure $500,000 or the gamble? c. If he or she chooses the sure $500.000, is the person a risk averter or a risk seeker?

1. Expected dollar return = 50% chances of winning full amount and 50% chances of losing full amount
= (50% of prize money) + (50% of 0)
= (0.5 * $1000000) + (0.5*0)
= $ 500000
2. When both the prizes offer the same return; then the person will choose the one which has less risk associated with. It is because people tend to be risk averse. Hence the person would choose the option 1.
3. As stated earlier the person is risk averter.
 
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