Answer:
Kindly check explanation
Explanation:
Given that :
Initial wealth = $1000
Cost of lottery = $5
Winning = $500
Number of players or tickets = 100
Only one winner can emerge :
P(winning) = 1/100
P(Not winning) = 1 - 1/100 = 99/100
P __ 1/100 _________ 99/100
X : [1000 + (500-5)] ___ (1000-5)
P(X): ____1/100 _______ 99/100
X : _____ 1495 _________995
Expected value E(x) :
E(X) = ΣX*p(x) = (1/100)*1495 + (99/100)*995 = 1000
C.)
Possible winning = $500 ; p(x) = 1/100
Possible loss = - 5 ;p(x) = 99/100
500 * (1/100) = 5
-5 * (99/100) = - 4.95
Σ(5 + - 4.95) = 5 - 4.95 = 0.05
Hence, gamble is favorable since 0.05 > 0