A person is trying to decide if they should buy a lottery ticket. The ticket costs $2.00. If the ticket is a winner, the prize would be $1,000. Knowing that winning $1,000 is not a certain outcome (state of nature), the person finds that the probability of winning is 0.001. Based on this information, the following payoff table can be constructed: Based on the expected monetary value of buying a ticket, what is the best decision?
A) Buy
B) Don't buy
C) Lose
D) Win

Question

A person is trying to decide if they should buy a lottery ticket. The ticket costs $2.00. If the ticket is a winner, the prize would be $1,000. Knowing that winning $1,000 is not a certain outcome (state of nature), the person finds that the probability of winning is 0.001. Based on this information, the following payoff table can be constructed:  Based on the expected monetary value of buying a ticket, what is the best decision?
A) Buy 
B) Don't buy 
C) Lose 
D) Win

Quizplus · Accepted Answer

The expected value for buying a ticket is calculated by multiplying the probability of winning by the prize amount and then subtracting the cost of the ticket: (0.001 x $1000) - $2 = -$1. So, on average, the person stands to lose $1 for every ticket they buy. Therefore, the best decision is not to buy the ticket (Option B).

A Person Is Trying to Decide If They Should Buy