Consider the Following Scenario to Answer the Questions That Follow

question 124

Multiple Choice

Consider the following scenario to answer the questions that follow.
Suppose that in an experimental setting, 100 students are asked to choose between Gamble A and Gamble B, where:
Gamble A: The student will receive $50 with a 70% probability and $100 with a 30% probability.
Gamble B: The student will receive $50 with a 50% probability, $200 with a 25% probability, and $0 (nothing) with a 25% probability.
-Which of the following shows the correct formula for the expected value (EV) of Gamble A?

• A) EV = 0.7 × ($50) + 0.3 × ($100)
• B) EV = 0.5 × ($50) + 0.3 × ($100)
• C) EV = 0.7 × ($50) + 0.5 × ($100)
• D) EV = 0.5 × ($50) + 0.5 × ($100)
• E) EV = 0.1 × ($50) + 0.2 × ($100)

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Definitions:

Marginal Cost

The additional cost incurred by producing one more unit of a product, which can vary depending on the level of production.

Pareto Efficient

A distribution of resources where improving the situation of one person cannot be achieved without detriment to another.

Net Benefit

The total positive effects or outcomes of a decision or action minus its total negative effects or costs.

Labor Supply Decisions

The choices individuals make regarding how much labor to supply to the market, influenced by factors such as wages, working conditions, and personal preferences.