Jacob is thinking of buying a $1 lottery ticket. In Lottery A, his odds of winning are 1 out of a 1000, and he may win $500. In Lottery B, his odds of winning are 1 out of 5000, but he may win $5000. Based on expected value theory, Jacob should
A) buy either ticket because both lotteries have the same expected value.
B) buy a ticket from Lottery B because it has a higher expected value.
C) buy a ticket from Lottery A because it has a higher expected value.
D) not buy either ticket because both lotteries have very low odds of winning.

Question

Quizplus · Accepted Answer

To calculate expected value, we multiply the probability of winning by the amount of the prize. For Lottery A, the expected value = (1/1000) x $500 = $0.50. For Lottery B, the expected value = (1/5000) x $5000 = $1.00. Therefore, Jacob should choose Lottery B because it has a higher expected value.

Jacob Is Thinking of Buying a $1 Lottery Ticket