Consider the following scenario to answer the questions that follow.
Suppose that in an experimental setting, 100 students are asked to choose between Gamble A and Gamble B, where:
Gamble A: The student will receive $50 with a 70% probability and $100 with a 30% probability.
Gamble B: The student will receive $50 with a 50% probability, $200 with a 25% probability, and $0 (nothing) with a 25% probability.
-Which of the following formulas shows the correct formula for the expected value (EV)of Gamble B?
A) EV = 0.5 × ($50) + 0.25 × ($25)
B) EV = 0.5 × ($50) + 0.25 × ($100) + 0.25 × ($250)
C) EV = 0.5 × ($50) + 0.5 × ($200)
D) EV = 0.5 × ($50) + 0.25 × ($200)
E) EV = 0.25 × ($50) + 0.25 × ($200)

Question

Quizplus · Accepted Answer

The expected value (EV) of a gamble is the sum of the products of the possible outcomes and their probabilities. In this case, the possible outcomes are $50, $200, and $0, and the probabilities are 0.5, 0.25, and 0.25, respectively. Therefore, the EV of Gamble B is:EV = 0.5 × ($50) + 0.25 × ($200) + 0.25 × ($0) = $125

Consider the Following Scenario to Answer the Questions That Follow