Suppose Dean has $500 and there are two companies he could invest X dollars in: Dog Gone Salon,which has a payoff of 2X with 50% probability and $0 with 50% probability and Pretty Kitty Grooming,which has a payoff of 4X with 25% probability and $0 with 75% probability.Dean's expected payoff from investing in Dog Gone Salon only is:
A) $1,000.
B) $500.
C) $0.
D) $1,500.

Question

Quizplus · Accepted Answer

To find the expected payoff from investing in Dog Gone Salon, we must calculate:
(0.5) * (2X) + (0.5) * (0) = X
Therefore, Dean's expected payoff from investing in Dog Gone Salon only is X, which is whatever amount he chooses to invest.
On the other hand, the expected payoff from investing in Pretty Kitty Grooming is:
(0.25) * (4X) + (0.75) * (0) = X
Since the expected payoffs are the same, Dean can invest all of his $500 in either company and expect to receive $500 in return on average. Therefore, the best choice is to choose the investment that Dean personally prefers or has more confidence in.

Suppose Dean Has $500 and There Are Two Companies He