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 monetary value (EMV) of buying a lottery ticket can be calculated as follows:
EMV = (Probability of winning x Prize) - Cost of ticket
EMV = (0.001 x $1,000) - $2.00
EMV = $1.00 - $2.00
EMV = -$1.00

Since the EMV is negative, it means that on average, the person will lose $1.00 for every ticket they buy. Therefore, the best decision is not to buy the ticket (answer B).

A Person Is Trying to Decide If They Should Buy