An unbiased coin is one which has an equal chance of yielding a head or a tail.

Question

An unbiased coin is one which has an equal chance of yielding a head or a tail. You have to choose between two options:

Option A: You will be given $200, no questions asked.

Option B: An unbiased coin will be tossed. If you get heads, you will be given $500, but if you get tails, you will not get any money. Which option (A or B) will you choose and why?

Answer:......................

The second part of the question is:

Now imagine that there are two differences in the options.

Option A: You are in a casino and will be charged $250 if you choose not to participate in gambling.

Option B: If you agree to gamble, a coin will be tossed. If you get heads, you will be given $1000, but if you get tails, you will be charged $500. Which option (A or B) will you choose and why?

Answer:...........

PLease explain why.

Thank you!

Explanation / Answer

Option A expected gain = 200

Option B expected gain = 500(1/2) +0 = 250

Since Expected gain is more in Option B, optin B is selected.

But if risk averse, then option A is better

----------------------------------------------------

Option A : Gain = -250

Option B: H T

P 0.5 0.5

Gain 1000 -500

500 -250

Expected gain = 250

As expected gain is more in option B, option B is chosen/

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