Answer to Question #270804 in Microeconomics for Anna

Question

In the following scenario Igor is given the following information:

​A 40% chance of winning $1,500 and a 60% chance of losing $1,000.

This would be known as a(n):

 

A. fair gamble.

B. unfair gamble.

C. almost-fair gamble.

D. better-than-fair gamble.

Answer 1

Solution:

The correct answer is A. fair gamble

 

This is because the expected value of this gamble is: $0

This is determined as follows:

= (0.40) ($1,500) + (0.60) (-$1,000) = 600 – 600 = 0

 

Since the expected value of this gamble is zero, it is a fair gamble.