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20 August, 06:32

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.

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  1. 20 August, 09:38
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    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
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