A person is trying to decide if he or she 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 he or she 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 monetary value of buying a ticket can be calculated by multiplying the probability of winning ($1,000) by the probability of winning (0.001) and subtracting the cost of the ticket ($2.00). That is, (0.001 * $1,000) - $2.00 = -$1.00. Since the expected value is negative, it is not a good investment and the best decision is to not buy the ticket.

A Person Is Trying to Decide If He or She