Question

Suppose it costs $2,500 to buy a defibrillator. Find the expected value of owning a defibrillator if there is a 4% probability that Johnson Club will lose a lawsuit regarding its operation, with each lawsuit resulting in Johnson Club being liable in the amount of $1,000,000.

Answer 1

$37,500

Explanation:

Expected value is the sum of the outcomes times their probability.

E(X) = (-2500) (1) + (1,000,000) (0.04)

E(X) = 37,500

Another way of calculating it:

E(X) = (-2500+0) (0.96) + (-2500+1,000,000) (0.04)

E(X) = 37,500