PSY 333 — Assignment 7
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Expected Value Theory
Compute the expected values for these two options. What choice would Expected Value Theory make? (2 points) Which do you prefer:
Option A: 100% chance of $240
Option B: 25% chance of $1000 and 75% chance of $0
Compute the expected values for these two options. What choice would Expected Value Theory make? (2 points) Which do you prefer:
Option A: 100% chance to lose $750
Option B: 75% chance to lose $1000 and 25% chance to lose $0
Compute the expected value for the two options in each of these three questions (3 points):
Q1
Option A: 100% chance of $3000
Option B: 80% chance of $4000
Q2
Option A: 25% chance of $3000 and 75% chance of nothing
Option B: 20% chance of $4000 and 80% chance of nothing
Q3
Option A: 1% chance of $3000 and 99% chance of nothing
Option B: 0.8% chance of $4000 and 99.2% chance of nothing
For the 3 questions in question 3, which of the two options does Expected Value Theory prefer (1 points)?
What is the expected value of these options? (2 points) Which do you prefer:
Option A: 95% chance to win $2.50 and a 5% chance to lose $0.75
Option B: 40% chance to win $8.50 and 60% chance to lose $1.50
Extra credit (bonus 2 points total)
The house edge on slot machines varies depending on the type of machine. For $1 slots (where you pay one dollar to play once), the house edge is about 10%. For $100 slots (where you pay $100 to play once), they house edge is about 5%.
If you play a $100 slot machine once, how much can you expect to get back on average?
If you play a $1 slot machine once, how much can you expect to get back on average?
If you play a $1 slot machine 100 times, how much would you expect to get back?
By considering your answers to part a) and c), if you are committed to spending a fixed amount of money (say $1,000) on gambling, which machine ($1 slots or $100 slots) is the best ( least worst) choice?
By considering your answers to part a) and b), if you are committed to playing for a fixed number of plays (say 100 pulls of the lever), which machine ($1 slots or $100 slots) is the best ( least worst)?
Based on your answers to part d) and e), why do you think the house edge gets smaller for $100 slots?
