. (a) Suppose someone forces you to make a choice between 1. getting $900 for su

Question

. (a) Suppose someone forces you to make a choice between 1. getting $900 for sure, or 2, a spin on a wheel that gives you a 90% chance of earning $1000 and a 10% chance of getting nothing. What is the expected value of the bet for choice 2 above? (b) Suppose someone forces you to make a choice between 1. losing $900 for sure, or 2, a spin on a wheel that gives you a 90% chance of losing $1000 and a 10% chance of losing nothing. What is the expected value of the bet for choice 2 above? (Consider losses to be negative numbers.)

Explanation / Answer

question 1

expected value =0.9*1000+0.1*0

=$900

expected value=win $900

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question 2

expected value=0.1*0+0.9*(-1000)=-900

expected value= loss of $900

win lose probability 0.9 0.1 amount (won/lose) 1000 0

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