Share
Explore BrainMass

Expected Returns in Gambling

Suppose you won the lottery and were offered a choice of either $500,000 in cash or a gamble in which you would get $1 million if a head were flipped but zero if a tail came up.

a) What is the expected value of the gamble?

b) Would you take the sure $500,000 or the gamble?

c) If you choose the sure $500,000, are you a risk averter or a risk seeker?

Solution Preview

a) What is the expected value of the gamble?
Probability of success * Prize+ Probability of Failure *0

Here ...

Solution Summary

This solution calculates the expected value of the gamble and justifies the decision of taking the sure $500,000.

$2.19