Expected Returns in Gambling
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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?
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Solution Summary
This solution calculates the expected value of the gamble and justifies the decision of taking the sure $500,000.
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a) What is the expected value of the gamble?
Probability of success * Prize+ Probability of Failure *0
Here ...
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