2 Bill is at a horse race meeting. He has \(\pounds 2\) left with two races to go. He only ever bets \(\pounds 1\) at a time. For each race he chooses a horse and then decides whether or not to bet on it. In both races Bill's horse is offered at "evens". This means that, if Bill bets \(\pounds 1\) and the horse wins, then Bill will receive back his \(\pounds 1\) plus \(\pounds 1\) winnings. If Bill's horse does not win then Bill will lose his \(\pounds 1\).
- Draw a decision tree to model this situation. Show Bill's payoffs on your tree, i.e. how much money Bill finishes with under each possible outcome.
Assume that in each race the probability of Bill's horse winning is the same, and that it has value \(p\).
- Find Bill's EMV when
(A) \(p = 0.6\),
(B) \(p = 0.4\).
Give his best course of action in each case. - Suppose that Bill uses the utility function utility \(= ( \text { money } ) ^ { x }\), to decide whether or not to bet \(\pounds 1\) on one race. Show that, with \(p = 0.4\), Bill will not bet if \(x = 0.5\), but will bet if \(x = 1.5\).