Sarah buys little stuffed animals for $5 each.They come in different varieties.If the producer stops making (retires)a certain variety,a stuffed animal of that variety will be worth $100;otherwise it is worth $0.There is 50% chance that any variety will be retired.When Sarah buys her next stuffed animal,the expected profit is
A)$50.
B)$47.50.
C)$45.
D)$0.

Question

Quizplus · Accepted Answer

The expected value of the profit is calculated as follows: There is a 50% chance the stuffed animal will be retired and worth $100, and a 50% chance it will be worth $0. The expected value of the stuffed animal is (0.5 * $100) + (0.5 * $0) = $50. Since Sarah buys the stuffed animal for $5, her expected profit is $50 - $5 = $45.

Sarah Buys Little Stuffed Animals for $5 Each