Read the following article, which introduces the concepts of expected value and optimal decision making. Then answer the question that follows.EXPECTED VALUE AND OPTIMAL DECISION MAKING, BY THE APLIA ECONOMICS CONTENT TEAMAs an alternative to raising property taxes in order to increase revenue, the village of Port Chester, New York, recently increased parking meter ratesby 25% and also raised parking fines. According to an article from the lohud.com news site (Gabriel Rom, "Port Chester Increases Parking Costs,Fines," lohud.com, May 2, 2017), officials are hoping that the increased parking costs will yield an additional $500,000 in revenue for the village.Although in the past drivers may have been more willing to risk parking illegally, the optimal behavior for Port Chester drivers may have changed asthe cost of a ticket has risen.Undoubtedly, some motorists will continue to take certain "gambles," perhaps risking a ticket for illegal parking in exchange for the benefit of savedtime. Is this behavior rational? Economists analyze decisions involving uncertainty using the concept of expected value to determine optimal coursesof action.In economics, the expected value (EV) of a gamble is calculated by assigning payoff values to potential outcomes and multiplying those values by theprobability they occur. For instance, suppose we are going to bet on the flip of a coin. I'll give you $20 if a fair coin lands on heads, and you'll give me$20 if it lands on tails. The expected value of my winnings is calculated as follows:EV = (PayoffHeads × Probability heads) + (PayoffTails × Probability Tails)×(-$20 × 0.5) + ($20 ×= $0=0.5)If the coin is flipped once, I will end up with either $20 or -$20, so it might seem strange to say that the "expected value" of my winnings is zero. Ifthe coin is flipped over and over again, however, heads and tails should each come up roughly an equal number of times; therefore, I have no reasonto expect positive or negative overall winnings in the long run.A person who is risk neutral is indifferent when a gamble has an expected value of $0 but will accept a gamble with a positive expected value andreject a gamble with a negative expected value.For the sake of simplicity, though, this analysis has assumed risk neutrality, despite people's tendency to be somewhat risk averse. In any situationthat is going to occur repeatedly, the risk diminishes as the average of multiple outcomes converges to the expected value. Unlike the extremevariation in possible outcomes that lead risk-averse people to buy health, home, or auto insurance, the amount that a person who parks illegally everyday will pay in fines will converge to the expected value more quickly.Suppose you pay $25 to enter into a raffle with a $400 prize. If you have a 5% chance of winning, the expected value of buying a raffle ticket is$

The expected value is a statistical term that denotes the typical outcome of a chance event after…

Answered: Suppose you pay $25 to enter into a…

Suppose you pay $25 to enter into a raffle with a $400 prize. If you have a 5% chance of winning, the expected value of buying a raffle ticket is $

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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