Question

Consider a game in which a coin will be flipped three times. For each heads you will be paid $100. Assume that the coin comes up heads with probability ⅔.

a. Construct a table of the possibilities and probabilities in this game. The table below gives you a hint on how to do this and shows you that there are now eight possible outcomes. (3 points)

b. Compute the expected value of the game. (2 points)

c. How much would you be willing to pay to play this game? (3 points)

d. Consider the effect of a change in the game so that if tails comes up two times in a row, you get nothing. How would your answers to parts a-c change? (2 points)

Answer 1