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3.) CHALLENGE: You discover a piece of art that you believe may be an original de Kooning, with 10% probability. If it is, it will be worth around $100mm. There is a 60% chance it was painted by a lesser expressionist, and so would be worth $12mm. There is a 30% chance it was painted by an art student, and so would be worthless. How much should you pay for an option to buy the work for $10mm? (Adapted from a SIG Interview question)

3.) CHALLENGE: You discover a piece of art that you believe may be an original de Kooning, with 10% probability. If it is, it will be worth around $100mm. There is a 60% chance it was painted by a lesser expressionist, and so would be worth $12mm. There is a 30% chance it was painted by an art student, and so would be worthless. How much should you pay for an option to buy the work for $10mm? (Adapted from a SIG Interview question)

A First Course in Probability (10th Edition)
A First Course in Probability (10th Edition)
10th Edition
ISBN:9780134753119
Author:Sheldon Ross
Publisher:Sheldon Ross
Chapter1: Combinatorial Analysis
Section: Chapter Questions
Problem 1.1P: a. How many different 7-place license plates are possible if the first 2 places are for letters and...
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3.) CHALLENGE: You discover a piece of art that you believe may be an original de Kooning, with 10% probability. If it is, it will be worth around $100mm. There is a 60% chance it was painted by a lesser expressionist, and so would be worth $12mm. There is a 30% chance it was painted by an art student, and so would be worthless. How much should you pay for an option to buy the work for $10mm? (Adapted from a SIG Interview question)
Transcribed Image Text:3.) CHALLENGE: You discover a piece of art that you believe may be an original de Kooning, with 10% probability. If it is, it will be worth around $100mm. There is a 60% chance it was painted by a lesser expressionist, and so would be worth $12mm. There is a 30% chance it was painted by an art student, and so would be worthless. How much should you pay for an option to buy the work for $10mm? (Adapted from a SIG Interview question)
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