Use the following statement to answer parts a) and b). Five hundred raffle tickets are sold for $3 each. One prize of $200 is to be awarded. Winners do not have their ticket costs of $3 refunded to them. Raul purchases one ticket. a) Determine his expected value. b) Determine the fair price of a ticket.

Question

Business

Mariam Mcclure

10 April, 17:43

Use the following statement to answer parts a) and b). Five hundred raffle tickets are sold for $3 each. One prize of $200 is to be awarded. Winners do not have their ticket costs of $3 refunded to them. Raul purchases one ticket. a) Determine his expected value. b) Determine the fair price of a ticket.

+4

Answers (1)

Know the Answer?

Aylin Wallace · Answer 1

A.) - 2.6

B.) 0.4

Explanation:

Ticket price = $3

Winning price = $200

Probability of winning (Pwin) = (1/500)

Probability of not winning (Ploss) = [ 1 - (1/500) ] = 499/500

Net income if Raul wins (Nwin) = $200 - $3 = $197 (no refund)

Net loss if Raul does not win (Nloss) = - $3

A.) Expected value is calculated by;

(Pwin * Nwin) + (Ploss * Nloss)

((1/500) * 197) + ((499/500) * - 3)

0.394 - 2.994 = - 2.6

B.) Fair Value is calculated by;

Cost of ticket + Expected value

3 - 2.6 = 0.4