Suppose Jack and Kate are at the town fair and are choosing which game to play. The first game has a bag with four marbles in it-1 red marble and 3 blue ones. The player draws one marble from the bag; if it is red, $20 is won, and if it is blue, $1 is won. The second game has a bag with 10 marbles in it-1 red, 4 blue, and 5 green. The player draws one marble from the bag; $20 is won if it is red, $5 is won if it is blue, and $1 is won if it is green. Both games cost $5 to play.If Jack only cares about the expected value of the outcome and does not care about risk, he should _______ the first game because it costs _______ and the expected payoff is _______.
A)not play; $5; $5.75
B)play; $5; $5.75
C)play; $5.75; $5
D)not play; $5.75; $5

Question

Quizplus · Accepted Answer

The expected value for the first game is calculated as follows: (1/4)*$20 + (3/4)*$1 = $5.75. Since the game costs $5 to play, and the expected value is $5.75, Jack has a positive expected value of $0.75, so he should play the game.

Suppose Jack and Kate Are at the Town Fair and Are