2A person is trying to decide if they should buy a lottery t

2.A person is trying to decide if they should buy a lottery ticket. The ticket costs $2.00. If the ticket is a winner, the prize would be $1,000. Knowing that winning $1,000 is not a certain outcome (state of nature), the person finds that the probability of winning is 0.001. Based on this information, the following payoff table can be constructed: Picture What is the expected monetary value of buying the ticket?

7.

Which of the following is NOT a component of the decision-making process?

Alternatives

Payoff

States of nature

Seasonal indexes

8.

Of the three components in any decision-making situation, which of the following cannot be controlled?

Alternatives

Payoff

States of nature

Seasonal indexes

9.

Applying probabilities to a payoff table results in:

expected opportunity loss for each alternative or act.

expected monetary value for each alternative or act.

value of perfect information.

a decision tree.

Solution

2.

If you win, you gain 998. If you lose, you lose -2.

Consider:

Thus,

E(x) = - $1 [ANSWER]

Thus, she shouldn\'t buy the ticket, as E(x) < 0.

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