Suppose that a raffle ticket costs $5 and there is a 99 percent chance of not winning. For this raffle to be considered a fair gamble, the winning prize must be worth:
A) $50.
B) $100.
C) $500.
D) $1,000.
E) $5,000.

Question

Quizplus · Accepted Answer

For a gamble to be considered fair, the expected value of participating should be equal to the cost of participation. Here, with a 99% chance of losing ($5 loss) and a 1% chance of winning, the expected value (EV) can be calculated as: EV = (0.01 * Prize) - (0.99 * $5). Setting EV equal to the cost of the ticket ($5) and solving for the Prize gives: $5 = (0.01 * Prize) - $4.95, which simplifies to Prize = $500.

Suppose That a Raffle Ticket Costs $5 and There Is