Domingo has a total wealth of $500,000 composed of a house worth $100,000 and $400,000 in cash.He keeps the cash in a safe deposit box,so that it is completely safe.However,there is a 10% chance that his house will burn down by the end of the year and be worth nothing and a 90% chance that nothing will happen to it.Without insurance,the expected value of his end-of-year wealth is:
A)$410,000.
B)$450,000.
C)$490,000.
D)$485,000.

Question

Quizplus · Accepted Answer

The expected value of Domingo's end-of-year wealth is calculated by considering the probability of each outcome. There is a 10% chance the house will be worth $0, and a 90% chance it will remain worth $100,000. The expected value of the house is (0.10 * $0) + (0.90 * $100,000) = $90,000. Adding the $400,000 in cash, the total expected value of his wealth is $490,000.

Domingo Has a Total Wealth of $500,000 Composed of a House