There are two states of the world.In state one the person receives one hundred dollars.In state two the person receives fifty dollars.If the person is rational and their expected return is $87.50,then the probability with which state one occurs must be
A) 0.25.
B) 0.50.
C) 0.75.
D) 1.00.

Question

Quizplus · Accepted Answer

The expected return is calculated as the sum of each outcome multiplied by its probability. Let $ p $ be the probability of state one occurring. The expected return is $ 100p + 50(1-p) = 87.50 $. Solving for $ p $, we get $ p = 0.75 $.

There Are Two States of the World