Question

A boardwalk game of chance costs 2 dollars to play. You have a 20% chance of winning 1 dollar, a 25% chance of winning back your entire 2 dollars, and a 35% chance to win 5 dollars. What is the expected value of playing the game if you lose your bet 20% of the time?

Answer 1

For a give event with outcomes:

{x₁, x₂, ..., xₙ}

Each with probabilities:

{p₁, p₂, ..., pₙ}

The expected value is:

Ev = x₁*p₁ + ... + xₙ*pₙ

Here we have the outcomes and probabilities:

win $1, with a probability 20%/100% = 0.2

win $2, with a probability 25%/100% = 0.25

win $5, with a probability of 35%/100% = 0.35

do not win, with a probability of 20%/100% = 0.2

Then the expected value of the game is:

Ev = $1*0.2 + $2*0.25 + $5*0.35 + $0*0.2 = $2.45

And if we know that the game costs $2, then the expected value is:

Ev = $2.45 - $2 = $0.45

The expected value is $0.45