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 $5 million with a 100 percent probability.
Gamble B: The student will receive $5 million with a 51 percent probability,$10 million with a 25 percent probability,and $0 million (nothing)with a 24 percent probability.
-What is the expected value of Gamble A?
A) $5 million
B) $5.01 million
C) $5.05 million
D) $10 million
E) $0 million

Question

Quizplus · Accepted Answer

The expected value is simply the probability of each outcome multiplied by the corresponding value, then summed up. For Gamble A, there is only one outcome which is $5 million with a probability of 100 percent. Thus, the expected value of Gamble A is $5 million.

Answer: Gamble A
 The expected value of Gamble A is $5 million, which is the same as the certain outcome. On the other hand, the expected value of Gamble B is calculated as follows: 
EV(B) = 0.51*$5 million + 0.25*$10 million + 0.24*$0 million
EV(B) = $2.55 million + $2.5 million + $0
EV(B) = $5.05 million
Therefore, if students are risk-averse and prefer the certainty of a $5 million payoff, then Gamble A is the best choice. However, if students are risk-loving and prefer a gamble with a higher expected value, then Gamble B is the best choice.

Consider the Following Scenario When Answering the Following Questions