Question

Miguel is playing a game in which a box contains four chips with numbers written on them. Two of the chips have the number 1, one chip has the number 3, and the other chip has the number 5. Miguel must choose two chips, and if both chips have the same number, he wins $2. If the two chips he chooses have different numbers, he loses $1 (–$1). Let X = the amount of money Miguel will receive or owe. Fill out the missing values in the table. (Hint: The total possible outcomes are six because there are four chips and you are choosing two of them.) Xi 2 –1 P(xi) What is Miguel’s expected value from playing the game? answer= $2 Based on the expected value in the previous step, how much money should Miguel expect to win or lose each time he plays? answer= $2 What value should be assigned to choosing two chips with the number 1 to make the game fair? Explain your answer using a complete sentence and/or an equation. A game at the fair involves a wheel with seven sectors. Two of the sectors are red, two of the sectors are purple, two of the sectors are yellow, and one sector is blue. Landing on the blue sector will give 3 points, landing on a yellow sector will give 1 point, landing on a purple sector will give 0 points, and landing on a red sector will give –1 point. Let X = the points you have after one spin. Fill out the missing values in the table. Xi P(xi) If you take one spin, what is your expected value? What changes could you make to values assigned to outcomes to make the game fair? Prove that the game would be fair using expected values. The point guard of a basketball team has to make a decision about whether or not to shoot a three-point attempt or pass the ball to another player who will shoot a two-point shot. The point guard makes three-point shots 30 percent of the time, while his teammate makes the two-point shot 48 percent of the time. Xi 3 0 P(xi) 0.30 0.70 Xi 2 0 P(xi) 0.48 0.52 What is the expected value for each choice? Should he pass the ball or take the shot himself? Explain. Claire is considering investing in a new business. In the first year, there is a probability of 0.2 that the new business will lose $10,000, a probability of 0.4 that the new business will break even ($0 loss or gain), a probability of 0.3 that the new business will make $5,000 in profits, and a probability of 0.1 that the new business will make $8,000 in profits. Claire should invest in the company if she makes a profit. Should she invest? Explain using expected values. If Claire’s initial investment is $1,200 and the expected value for the new business stays constant, how many years will it take for her to earn back her initial investment?

Answer 1

1) We have that there are in total 6 outcomes If we name the chips by 1a, 1b, 3 ,5 the combinations are: 1a,3 \ 1b, 3 \1a, 5\ 1b, 5\ 3,5\1a,1b. Of those outcomes, only one give Miguel a profit, 1-1. THen he gets 2 dollars and in the other cases he lose 1 dollar. Thus, there is a 1/6 probability that he gets 2$ and a 5/6 probability that he loses 1$.
2) We can calculate the expected value of the game with the following: E=$\frac{1}{6}*2- \frac{5}{6} *1$. In general, the formula is $E= \sum{p*V}$ where E is the expected value, p the probability of each event and V the value of each event. This gives a result of E=2/6-5/6=3/6=0.5$ Hence, Miguel loses half a dollar ever y time he plays.
3) We can adjust the value v of the winning event and since we want to have a fair game, the expecation at the end must be 0 (he must neither win or lose on average). Thus, we need to solve the equation for v:
0=$\frac{1}{6}v -\frac{5}{6} =0$. Multiplying by 6 both parts, we get v-5=0 or that v=5$. Hence, we must give 5$ if 1-1 happens, not 2.
4) So, we have that the probability that you get a red or purple or yellow sector is 2/7. We have that the probability for the blue sector is only 1/7 since there are 7 vectors and only one is blue. Similarly, the 2nd row of the table needs to be filled with the product of probability and expectations. Hence, for the red sector we have 2/7*(-1)=-2/7, for the yellow sector we have 2/7*1=2/7, for the purple sector it is 2/7*0=0, for the blue sector 1/7*3=3/7. The average payoff is given by adding all these, hence it is 3/7.
5) We can approach the problem just like above and set up an equation the value of one sector as an unknown. But here, we can be smarter and notice that the average outcome is equal to the average outcome of the blue sector.  Hence, we can get a fair game if we make the value of the blue sector 0. If this is the case, the sum of the other sectors is 0 too (-2/7+0+2/7) and the expected value is also zero.
6) We want to maximize the points that he is getting. If he shoots three points, he will get 3 points with a probability of 0.30. Hence the average payoff is 0.30*3=0.90. If he passes to his teammate, he will shoot for 2 points, with a success rate of 0.48. Hence, the average payoff is 0.48*2=0.96. We see that he should pass to his player since 0.06 more points are scored on average.
7) Let us use the expections formula we mentioned in 1. Substituting the possibilities and the values for all 4 events (each event is the different profit of the business at the end of the year).
E=0.2*(-10000)+0.4*0+0.3*5000+0.1*8000=-2000+0+1500+800=300$
This is the average payoff of the firm per year.
8) The firm goes even when the total profits equal the investment. Suppose we have that the firm has x years in business. Then x*300=1200 must be satisfied, since the investment is 1200$ and the payoff per year is 300$. We get that x=4. Hence, Claire will get her investment back in 4 years.

Answer 2

Answer:

To check all the events (6), we label the chips. Suppose one chip with 1 is labeled R1 and the other B1 (as if they were red and blue). Now, lets take all combinations; for the first chip, we have 4 choices and for the 2nd chip we have 3 remaining choices. Thus there are 12 combinations. Since we dont care about the order, there are only 6 combinations since for example R1, 3 is the same as 3, R1 for us.

The combinations are: (R1, B1), (R1, 3), (R1, 5), (B1, 3), (B1, 5), (3,5)

We have that in 1 out of the 6 events, Miguel wins 2$ and in five out of the 6 events, he loses one. The expected value of this bet is: 1/6*2+5/6*(-1)=-3/6=-0.5$. In general, the expected value of the bet is the sum of taking the probabilities of the outcome multiplied by the outcome; here, there is a 1/6 probability of getting the same 2 chips and so on. On average, Miguel loses half a dollar every time he plays.