Question

Suppose we play the following game based on tosses of a fair coin. You pay me $10, and I agree to pay you $n 2 if heads comes up first on the nth toss. If we play this game repeatedly, how much money do you expect to win or lose per game over the long run

Answer 1

In the long run, ou expect to lose $4 per game

Explanation:

Suppose we play the following game based on tosses of a fair coin. You pay me $10, and I agree to pay you $n^2 if heads comes up first on the nth toss.

Assuming X be the toss on which the first head appears.

then the geometric distribution of X is:

X
`\sim` geom(p = 1/2)

the probability function P can be computed as:

`P (X = n) = p(1-p)^(n-1)`

where

n = 1,2,3 ...

If I agree to pay you $n^2 if heads comes up first on the nth toss.

this implies that , you need to be paid
`\sum \limits ^(n)_(i=1) n^2 P(X=n)`

`\sum \limits ^(n)_(i=1) n^2 P(X=n) = E(X^2)`

`\sum \limits ^(n)_(i=1) n^2 P(X=n) =Var (X) + [E(X)]^2`

`\sum \limits ^(n)_(i=1) n^2 P(X=n) = (1-p)/(p^2)+((1)/(p))^2` ∵ X
`\sim` geom(p = 1/2)

`\sum \limits ^(n)_(i=1) n^2 P(X=n) = (1-p)/(p^2)+(1)/(p^2)`

`\sum \limits ^(n)_(i=1) n^2 P(X=n) = (1-p+1)/(p^2)`

`\sum \limits ^(n)_(i=1) n^2 P(X=n) = (2-p)/(p^2)`

`\sum \limits ^(n)_(i=1) n^2 P(X=n) = (2-(1)/(2))/(((1)/(2))^2)`

`\sum \limits ^(n)_(i=1) n^2 P(X=n) =\frac{ (4-1)/(2) }{{(1)/(4)}}`

`\sum \limits ^(n)_(i=1) n^2 P(X=n) =\frac{ (3)/(2) }{{(1)/(4)}}`

`\sum \limits ^(n)_(i=1) n^2 P(X=n) =\frac{ 1.5}{{0.25}}`

`\sum \limits ^(n)_(i=1) n^2 P(X=n) =6`

Given that during the game play, You pay me $10 , the calculated expected loss = $10 - $6

= $4

∴

In the long run, you expect to lose $4 per game