Question

Suppose lightning strikes at an average of 1.4 strikes per minute during a particular storm. You play the following game: if the next strike occurs within the next minute, you win 3 dollars, if the next strike occurs between 1 minute and 2 minutes from now, you win 5 dollars, and if the next strike occurs more than 2 minutes from now, you win 1 dollar. How much should someone be charged to play this game, to make it a "fair game?"

Answer 1

$3.25

Explanation:

Given that:

Mean, λ = 1.4

Strike within next minute = $3 won

Strike between one and 2 minutes = $5

Strike more than 2 minutes = $1

Probability that next strike occurs within the next minute :

Using poisson :

P(x < 1) = 1 - e^-(λx) ;

P(x < 1) = 1 - e^-(1.4*1) = 1 - e^-1.4

P(x < 1) = 1 - 0.2465969

P(x < 1) = 0.7534030

Next strike occurs between 1 and 2 minutes :

(1 < x < 2) :

P(x < 2) - P(x < 1)

P(x < 2) = 1 - e^-(λx) ;

P(x < 2) = 1 - e^-(1.4*2) = 1 - e^-2.8

P(x < 2) = 1 - 0.0608100

P(x < 2) = 0.9391899

P(x < 2) - P(x < 1)

0.9391899 - 0.7534030 = 0.1857869

P(striking after 2 minutes)

P(x > 2) = e^-(λx) ;

P(x > 2) = e^-(1.4*2) = e^-2.8

P(x > 2) = 0.0608100

Amount charged :

(0.7534030 * 3) + (0.1857869 * 5) + (0.06081 * 1)

= 3.2499

= $3.25