Question

PROBLEM 2:

Happy_Rabbit is running a promotional raffle that offers a chance to win either a lifetime discount (which results in a $1,000 membership savings) or a 2-year limited discount (which results in a $150 membership savings).

• Winning a lifetime discount has a 1-in-250 chance.

• Winning a 2-year limited discount has a 1-in-20 chance.

Is this promotion worth it if the tickets cost to participate is $20?

PROBLEM 3:

You have been offered a business deal. You estimate that there is a 1% chance of making $100,000; 10% chance of making $20,000; a 25% chance of making $50,000; and 60% chance of making $0. How much should you be willing to pay for this deal?

Answer 1

PROBLEM 2:

Expected savings by participations = Probability of Winning a lifetime discount * lifetime discount + Probability of Winning a 2-year limited discount *  2-year limited discount

= (1/250) * $1,000 + (1/20) * $150

= $11.5

Cost to participate = $20

Since the cost to participate is greater than the expected savings, the promotion is not worth to be participated.

PROBLEM 3:

Expected profit by business deal = Sum of probabilities of outcome * Profit

= 0.01 * $100,000 + 0.1 * $20,000 + 0.25 * $50,000 + 0.6 * $0

= $155,00

Thus, the maximum you be willing to pay for this deal is the expected profit so that you did not incur any loss.

Maximum you be willing to pay for this deal = $155,00