?

Microeconomics

Free Version

Upgrade subject to access all content

Difficult

Comparing Lotteries

MICRO-@SYBIB

Suppose that a player with a utility function $u(x) = \sqrt{x}$ is offered the following lottery.

A fair coin is going to be flipped. If it lands on heads, the player will get $\$ 9$. If it lands on tails, he will get $\$ 6$ with a 75% probability and $\$ 9$ with a 25% probability.

Suppose he is offered another lottery: a fair coin is tossed. If it is heads, he gets zero; if tails, he gets $K$ dollars.

What is the value of $K$ that makes him indifferent between both lotteries?

A

0

B

$42.25

C

$10.5625

D

$12.00