Consider the following scenario when answering the following questions:
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 percent probability and $100 with a 30 percent probability.
Gamble B: The student will receive $50 with a 50 percent probability,$200 with a 25 percent probability,and $0 (nothing)with a 25 percent probability.
-What is the expected value of Gamble A?
A) $0
B) $100
C) $50
D) $45
E) $65

Question

Quizplus · Accepted Answer

To find the expected value of Gamble A, we use the formula:
Expected value = (probability of receiving outcome 1 x value of outcome 1) + (probability of receiving outcome 2 x value of outcome 2)
Expected value of Gamble A = (0.70 x $50) + (0.30 x $100) = $35 + $30 = $65
To determine the best choice, we compare the expected values of Gamble A and Gamble B. The expected value of Gamble B can be calculated as follows:
Expected value of Gamble B = (0.50 x $50) + (0.25 x $200) + (0.25 x $0) = $25 + $50 + $0 = $75
Since the expected value of Gamble B is higher than that of Gamble A, the best choice is Gamble B.

Consider the Following Scenario When Answering the Following Questions