Suppose that a person won the Florida lottery and was offered a choice of two prizes: (1) sure $500,000 or (2) a coin-toss gamble in which he or she would get $1 million if a head were flipped and zero if a tail. What is the expected dollar return on the gamble?

for sure expected return = 100 %

for gamble expected return = 50 %

Step-by-step explanation:

given data

prize 1 = $ 500000

prize 2 = $1 million if head

prize 2 = 0 if tail

to find out

expected return on the gamble

solution

we know that expected return is

expected return = probability * return ... 1

so in case of sure

probability is 1

and return is 100%

so from equation 1

expected return = probability * return

expected return = 1 * 100% = 100%

and in case of gamble

probability = 0.5 because coil head and tail chance is 0.5

so rate of return 1 = 1 * 0.5 = 50%

and rate of return 2 = 1 * 100% = 100%

so return is = (1000000 - 500000) / 500000

return = 1 = 100%

so from equation 1

expected return = probability * return

expected return = 0.5 * 100 %

expected return = 50 %