Team X often play their last regular basketball game against University Y. Suppo

ID: 1176596 • Letter: T

Question

Team X often play their last regular basketball game against University Y. Suppose: i) the odds are estimated as 1/3-2/3 in favor of Y;

ii) a Team X fan has $1000, his utility of income is u(x) = x^1/2; and

iii) a team Y fan offers him a $B = $300 betting

game: He loses $300 (i.e., the team Y fan wins $300) if team Y wins; and he wins $600 (i.e., the

team Y fan loses $600) if Team X wins.

(a) What is the Team X Fan expected income ?

(b) What is his expected utility?

Expected value = 1/3 * 1600 + 2/3 * 700 = $1000

expected utility = 1/3 * (1600)^0.5 + 2/3 * (700)^0.5 = 30.97

current utility = (1000)^0.5 = 31.622

expected utility < current utility, so I advice him not to go for betting.

this is the case of risk aversion.

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