SOLUTION: In a lottery game, one can win $10,000 with probability 0.01 and $1000 with probability 0.05. How much should one pay for a lottery ticket to make the game fair? Thanks

Question 360605: In a lottery game, one can win $10,000 with probability 0.01 and $1000 with probability 0.05. How much should one pay for a lottery ticket to make the game fair?
Thanks
Answer by Edwin McCravy(20054) (Show Source): You can put this solution on YOUR website!
In a lottery game, one can win $10,000 with probability 0.01 and $1000 with probability 0.05. How much should one pay for a lottery ticket to make the game fair?

We calculate the expectation:

Winnings   Probability   Winning�probability
$10000        0.01            $100
 $1000        0.05             $50
                         -------------------
            Expectation =     $150

So on the average if someone entered this same lottery free many times, 
they would expect to average winning $150 per time they entered.

So for the game to be fair, one would have to expect $0, and thus one
should pay $150 per ticket.

Edwin

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