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Say that you are playing rock-scissors-paper with a friend. You have played with him several times and have realized he usually follows a pattern. So, after playing for a very (very!) long time you have realized that the probability that you win is 8/12, that you tie is 1/12 and that you loose is 3/12. Making use of that piece of information one day you tell him: I will pay $1 for playing with you. If I win I get my $1 back together with $1 from you. If we tie I only get my $1 back. If I loose I give you my $1. la) Compute your expected profit from this bet. Justify your answer. 1b) What is the fair value of this bet? Justify your answer.

Say that you are playing rock-scissors-paper with a friend. You have played with him several times and have realized he usually follows a pattern. So, after playing for a very (very!) long time you have realized that the probability that you win is 8/12, that you tie is 1/12 and that you loose is 3/12. Making use of that piece of information one day you tell him: I will pay $1 for playing with you. If I win I get my $1 back together with $1 from you. If we tie I only get my $1 back. If I loose I give you my $1. la) Compute your expected profit from this bet. Justify your answer. 1b) What is the fair value of this bet? Justify your answer.

Algebra and Trigonometry (MindTap Course List)
Algebra and Trigonometry (MindTap Course List)
4th Edition
ISBN:9781305071742
Author:James Stewart, Lothar Redlin, Saleem Watson
Publisher:James Stewart, Lothar Redlin, Saleem Watson
Chapter14: Counting And Probability
Section14.CR: Chapter Review
Problem 35E
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Say that you are playing rock-scissors-paper with a friend. You have played with him several times and have realized he usually follows a pattern. So, after playing for a very (very!) long time you have realized that the probability that you win is 8/12, that you tie is 1/12 and that you loose is 3/12. Making use of that piece of information one day you tell him: I will pay $1 for playing with you. If I win I get my $1 back together with $1 from you. If we tie I only get my $1 back. If I loose I give you my $1. 1a) Compute your expected profit from this bet. Justify your answer. 1b) What is the fair value of this bet? Justify your answer.
Transcribed Image Text:Say that you are playing rock-scissors-paper with a friend. You have played with him several times and have realized he usually follows a pattern. So, after playing for a very (very!) long time you have realized that the probability that you win is 8/12, that you tie is 1/12 and that you loose is 3/12. Making use of that piece of information one day you tell him: I will pay $1 for playing with you. If I win I get my $1 back together with $1 from you. If we tie I only get my $1 back. If I loose I give you my $1. 1a) Compute your expected profit from this bet. Justify your answer. 1b) What is the fair value of this bet? Justify your answer.
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