A friend offers you a chance to play a game in which there are only two outcomes, each with equal probability. If you get the "good" outcome, you win $80. But if you get the bad outcome, you only win $20. What price to play would make this a fair game (fair bet)?
A friend offers you a chance to play a game in which there are only two outcomes, each with equal probability. If you get the "good" outcome, you win $80. But if you get the bad outcome, you only win $20. What price to play would make this a fair game (fair bet)?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
A friend offers you a chance to play a game in which there are only two outcomes, each with equal probability. If you get the "good" outcome, you win $80. But if you get the bad outcome, you only win $20.
What price to play would make this a fair game (fair bet)? Carefully follow all mathematical instructions in your answer.
Expert Solution
Step 1
A game is said to be fair when the value of a game is zero, it means there is neither gain of loss for a player who plays the game.
So, the expected value (after considering the cost) of a fair game is zero.
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