Microeconomics (2nd Edition) (Pearson Series in Economics)
2nd Edition
ISBN: 9780134492049
Author: Daron Acemoglu, David Laibson, John List
Publisher: PEARSON
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Chapter 17, Problem 8Q
To determine
Type of risk-taker, when a coin toss can make an individual lose
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In a final round of a MegaMillion TV show a contestant has a won $1 million and has a chance of doubling the reward. If he loses his winnings drop to $500,000. The contestant thinks his chances of winning is 50%. Should he play? What is the lowest probability of a correct guess that will make his betprofitable? Please show your work.
You're a contestant on a TV game show. In the final round of the game, if contestants answer a question correctly, they will increase their current winnings of $1 million to $3 million. If they are wrong, their prize is decreased to $750,000. You believe you have a 25% chance of answering the question correctly.
Ignoring your current winnings, your expected payoff from playing the final round of the game show is [$ blank]. Given that this is positive [blank (positive/negative)], you should [blank (should/should not)] play the final round of the game. (Hint: Enter a negative sign if the expected payoff is negative.)
The lowest probability of a correct guess that would make the guessing in the final round profitable (in expected value) is [blank]. (Hint: At what probability does playing the final round yield an expected value of zero?)
how do you do you find the expected payback for this problem? Find the expected payback for a game in which you bet
$1010
on any number from
00
to
399.399.
If your number comes up, you get
$400400.
Chapter 17 Solutions
Microeconomics (2nd Edition) (Pearson Series in Economics)
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