Consider a lottery with three possible outcomes: R125 000 will be received with a probability 0.2, R100 000 with a probability of 0.3, and R50 000 with a probability 0.5
What would a risk-neutral person pay to play the lottery?

Question

GPT-3.5 Turbo · Accepted Answer

A risk-neutral person would be willing to pay the expected value of the lottery. 
The expected value of the lottery can be calculated as follows:
Expected value = (probability of R125 000) * R125 000 + (probability of R100 000) * R100 000 + (probability of R50 000) * R50 000
Expected value = (0.2) * R125 000 + (0.3) * R100 000 + (0.5) * R50 000
Expected value = R25 000 + R30 000 + R25 000
Expected value = R80 000
So, a risk-neutral person would be willing to pay R80 000 to play the lottery.

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