Two slot machines offer to double your money 3 times out of 5. Machine A takes $10 bets and Machine B takes $100 bets on each occasion. A risk-averse investor prefers to bet on ________.
A) Machine A
B) Machine B
C) does not matter
D) none of the above

Question

Quizplus · Accepted Answer

To calculate the expected value for each machine, we can use the formula:
(Earnings from winning bet * Probability of winning) - (Amount of bet * Probability of losing)
For Machine A,
(Earnings from winning bet = $20, Probability of winning = 3/5, Amount of bet = $10, Probability of losing = 2/5)
Expected value = (20*3/5) - (10*2/5) = $8
For Machine B,
(Earnings from winning bet = $200, Probability of winning = 3/5, Amount of bet = $100, Probability of losing = 2/5)
Expected value = (200*3/5) - (100*2/5) = $80
Therefore, Machine A has a higher expected value and is the better choice for a risk-averse investor.

Two Slot Machines Offer to Double Your Money 3 Times