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: What is the decision using a maximax or optimistic approach?
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:  What is the decision using a maximax or optimistic approach?
A) Buy 
B) Don't buy 
C) Lose 
D) Win

Quizplus · Accepted Answer

In the maximax or optimistic approach, the decision maker selects the option with the maximum possible payoff. The best-case scenario for buying the ticket is winning the $1,000 prize, which would result in a net gain of $998 ($1,000 prize - $2 cost of the ticket). Therefore, the maximax decision is to buy the lottery ticket.

A Person Is Trying to Decide If They Should Buy