Question

If you select a chip at random from a jar with 7 red, 2 green and 1 blue chip. If the chip you pick is red, you win $10,000, if it is green, you wil $20,000 and if it is blue, you lost $100,000. What is your expected value of this game?

Answer 1

prob(red) = 7/10
expected return for red = (7/10)(10000) = 7000
prob(green) = 2/10
expected return for green = (2/10)(20000) = 4000
prob(blue_ = 1/10
expected return for blue = (1/10)(-100000) = - 10000
expected value = 7000+4000-10000 = 1000