Pearson eText Microeconomics -- Access Card
2nd Edition
ISBN: 9780136849513
Author: Acemoglu, Daron, Laibson, David, List, John
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 15, Problem 9P
To determine
Expected value of the gamble.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
A wheel of fortune in a gambling casino has 54 different slots in which the wheel pointer can stop. Four of the 54 slots contain the number 9. For a 1 dollar bet on hitting a 9, if he or she succeeds, the gambler wins 10 dollars plus the return of the 1 dollar bet. What is the expected value of this gambling game? What is the meaning of the expected value result?
In a large casino, the house wins on its blackjack tables with a probability of 50.9%. All bets at blackjack are 1 to 1, which means that if you win, you gain the amount you bet, and if you lose, you lose the amount
you bet.
a. If you bet $1 on each hand, what is the expected value to you of a single game? What is the house edge?
b. If you played 150 games of blackjack in an evening, betting $1 on each hand, how much should you expect to win or lose?
c. If you played 150 games of blackjack in an evening, betting $3 on each hand, how much should you expect to win or lose?
d. If patrons bet $7,000,000 on blackjack in one evening, how much should the casino expect to earn?
a. The expected value to you of a single game is $
(Type an integer or a decimal.)
Suppose you have $35,000 in wealth. You have the opportunity to play a game called "Big Bet/Small Bet." In this
game, you first choose whether you would like to make a big bet of $15,000 of a small bet of $5,000. You then roll a
fair die. If you roll a 4, 5, or 6, you win the game and earn $15,000 for the big bet or $5,000 for the small bet. If you
roll a 1, 2, or 3, you lose and lose $15,000 for the big bet and $5,000 for the small bet
the
game
Utility
U₂
U₁
BEL
0
11
LATE
EE
ARTE
Are the Small Bet and Big Bet considered fair bets?
O Big Bet is fair, but Small Bet is not.
No, both are not fair.
Yes, both are fair.
20
OSmall Bet is fair, but Big Bet is not.
G
HA
1
35
D
E
1
1
1
1
1
F
1
U
50 Income
(thousands
of dollars)
Chapter 15 Solutions
Pearson eText Microeconomics -- Access Card
Knowledge Booster
Similar questions
- Hello can any one help with this Economics question: A contractor spends Dollar 3,000 to prepare for a bid on a construction project which, after deducting manufacturing expenses and the cost of bidding, will yield a profit of dollar 25,000 if the bid is won. If the chance of winning the bid is ten per cent, compute his expected profit and state the likely decision on whether to bid or not to bid?arrow_forwardHere is my question!arrow_forwardYou are evaluating the possibility that your company bids $150,000 for a particular construction job. (a) If a bid of $150,000 corresponds to a relative bid of 1.20, what is the dollar profit that your company would make from winning the job with this bid? Show your work. (b) Calculate an estimate of the expected profit of the bid of $150,000 for this job. Assume that, historically, 55 percent of the bids of an average bidder for this type of job would exceed the bid ratio of 1.20. Assume also that you are bidding against three other construction companies. Show your work.arrow_forward
- You're a contestant on a TV game show. In the final round of the game, if contestants answer a question correctly, they will increase their current winnings of $1 million to $3 million. If they are wrong, their prize is decreased to $750,000. You believe you have a 25% chance of answering the question correctly. Ignoring your current winnings, your expected payoff from playing the final round of the game show is [$ blank]. Given that this is positive [blank (positive/negative)], you should [blank (should/should not)] play the final round of the game. (Hint: Enter a negative sign if the expected payoff is negative.) The lowest probability of a correct guess that would make the guessing in the final round profitable (in expected value) is [blank]. (Hint: At what probability does playing the final round yield an expected value of zero?)arrow_forwardSuppose your wealth is 8 and you are considering a bet of a 50% chance of winning $4 and a 50% chance of losing $4. What is your risk premium given you have In utility ? Draw a diagram and label the relevant values.arrow_forwardThe chief executive officer of a publishing company says she is indifferentbetween the certainty of receiving $7,500 and a gamble where there is a 0.5 chance of receiving $5,000 and a 0.5 chance of receiving $10,000. a). Does she seem to be a risk averter, a risk lover, or risk- neutral? Explain. b). What is the coefficient of variation of the risky option (gamble)?arrow_forward
- Suppose that you graduate from college next year and you have two career options: 1) You will start a job in an investment bank paying a $100,000 annual salary. 2) You will start a Ph.D. in economics and, as a student, you will receive a $20,000 salary. You are bad with decisions, so you are letting a friend of yours decide for you by flipping a coin. The probabilities of options 1 and 2 are, therefore, each 50%. a) Illustrate, using indifference curves, your preferences regarding consumption choices in the two different states of the world. Assume that you are risk-averse. [Include also the 45 degrees line in your figure] b) Now show how the indifference curves would change if you were substantially more risk averse than before. Explain. c) Now show the indifference curves if you are risk neutral and if you are risk loving. d) Show your expected utility preferences from point a) mathematically.arrow_forwardSuppose you play a game with a spinner. You play each game by spinning the spinner once. P(red) = P(blue) = Ķ, and P(green) = . If you land on red, you pay 10 pesos. If you land on blue, you don't pay or win anything. If you land on green, you win 10 pesos. What is the expected profit of the game?arrow_forwardQuestion 5 You negotiate with a retailer over a contract according to which the retailer would buy a large fraction of your current production for next year. The retailer is perfectly informed about consumer demand, but you do not know whether demand is high or low. You only know that the probability for high demand is 80%. If demand is high, the retailer's profit is £5 million minus what he pays to you according to your contract. If demand is low, the retailer's profit is £3 million minus what he pays to you. Your costs of producing the output specified in the contract are £1 million. You can make sequential offers for the retailer's total payment for you to deliver a fixed quantity of your production. As you know that your competitor is also seeking a similar contract with this retailer, and the retailer can only supply one firm due to limited shelf space, you know that you can only make at most two offers. If your first offer is rejected, the retailer will strike the deal with your…arrow_forward
- You are considering a $500,000 investment in the fast-food industry and have narrowed your choice to either a McDonald's or a Penn Station East Coast Subs franchise. McDonald's indicates that, based on the location where you are proposing to open a new restaurant, there is a 25 percent probability that aggregate 10-year profits (net of the initial investment) will be $16 million, a 50 percent probability that profits will be $8 million, and a 25 percent probability that profits will be -$1.6 million. The aggregate 10-year profit projections (net of the initial investment) for a Penn Station East Coast Subs franchise is $48 million with a 2.5 percent probability, $8 million with a 95 percent probability, and -$48 million with a 2.5 percent probability. Considering both the risk and expected profitability of these two investment opportunities, which is the better investment? Explain carefully.arrow_forwardYou're a contestant on a TV game show. In the final round of the game, if contestants answer a question correctly, they will increase their current winnings of $3 million to $4 million. If they are wrong, their prize is decreased to $2,250,000. You believe you have a 25% chance of answering the question correctly. Ignoring your current winnings, your expected payoff from playing the final round of the game show is. Given that this is ______________ (POSITIVE/NEGATIVE), you___________ (SHOULD/ SHOULD NOT) play the final round of the game. (Hint: Enter a negative sign if the expected payoff is negative.) The lowest probability of a correct guess that would make the guessing in the final round profitable (in expected value) is (Hint: At what probability does playing the final round yield an expected value of zero?)arrow_forwardYou are taking two courses this semester, biology and chemistry. You have quizzes coming up in both classes. The table below shows your grade on each quiz for different numbers of hours studying for each quiz. For instance, the second row implies that one hour of studying for Chemistry will generate an expected grade of 73 on Chemistry, whereas one hour of studying for Biology will generate an expected grade of 75 on Biology. Hours of Study Chemistry Biology 0 65 68 1 73 75 2 79 80 3 83 83 Your goal is to maximize your average grade on the two quizzes. Use the idea of optimization in differences to decide how much time you would spend studying for each quiz if you had a total of 1, 2, or 3 hours to prepare for each exam. If you had 1 hour, you should study..... If you had 2 hours, then you should study.... hour(s) for chemistry and..... hour(s) for biology. If you had 3 hours, then you should study ..... hour(s) for chemistry and..... hour(s) for biology.…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Managerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning