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# Probability: Expected Value and Decision Analysis

Expected Value and Decision Analysis:

1- In a certain state lottery, a lottery ticket cost \$8. In terms of the decision to purchase or not to purchase a lottery ticket, suppose that the following payoff table applies:

State of nature
Decision alternative Wins s1 Lose s2
Purchase lottery ticket d1 290,000 -8
Do not purchase lottery ticket d2 0 0

1. A realistic estimate of the chances of winning are 1 in 290,000. Use the expected value approach to recommend a decision.

2. If a particular decision maker assigns an indifference probability of 0,00004 to the \$0 payoff, would this individual purchase a lottery ticket? Use the expected utility to justify your answer.

#### Solution Preview

Expected Value and Decision Analysis:

1- In a certain state lottery, a lottery ticket cost \$8. In terms of the decision to purchase or not to purchase a lottery ticket, suppose that the following payoff table applies:

State of nature
Decision alternative Wins s1 Lose s2
Purchase lottery ticket d1 290,000 -8
Do not purchase lottery ticket d2 0 0

1. A realistic estimate of the chances of winning are 1 in ...

#### Solution Summary

The probability of expected value and decision analysis are given for a state lottery.

\$2.19