17-5. You are offered the following gamble based on coin flips. If the first head occurs on the first flip , you get $2 IF the first head occurs on the second flip you get $4, and so on, so that is the first head is on the Nth flip , you get $2N. The game ends only when a flip on the coin results in heads. What is the expected value of this gamble? When offered, most people say they would only pay less than $10 to play this game. What are two reasons why people are willing to pay so much less than the expected value?

Managerial Economics: A Problem Solving Approach
5th Edition
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Chapter17: Making Decisions With Uncertainty
Section: Chapter Questions
Problem 17.5IP
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17-5. You are offered the following gamble based on coin flips. If the first head occurs on the first flip , you get $2 IF the first head occurs on the second flip you get $4, and so on, so that is the first head is on the Nth flip , you get $2N. The game ends only when a flip on the coin results in heads. What is the expected value of this gamble? When offered, most people say they would only pay less than $10 to play this game. What are two reasons why people are willing to pay so much less than the expected value?

 

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