Question

A diamond merchant has a chance to buy one of 4 diamonds and wants to sell it immediately. One costs only $1000, but he has a 90% chance of getting $5000 for it (or not selling it at all). The second costs $10,000, and he has a 60% change of selling it for $25,000 (or not selling it at all). The third costs $20,000, but he has a 50% chance of selling it for $60,000 (or not selling it at all). The last diamond costs $50,000, but he has a 1% chance of selling it for $1,000,000 (or not selling it at all). Which diamond gives him the best expected value?

Answer 1

Hello there!

It would be $20000.

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Answer 2

Explanation:

Diamond 1:

Expected profit=(5000-1000)0.90=3600

Diamond 2:

Expected profit=(25000-10000)0.60=9000

Diamond 3:

Expected profit=(60000-20000)0.50=20000

Diamond 4:

Expected profit=(100,00,000-50,000)0.01=99500

Thus expected value is the most for diamond 4.