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PC.3 Notes

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13 views

PC.3 Notes

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h87bnzmcg2
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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PC.3 Notes: Expected Value

Expected Value

Expected Value is the average gain or loss of an event if the procedure is repeated many times.

We can compute the expected value by multiplying every possible outcome by the probability of that
outcome, then adding up the products.

Expected value = (probability of event 1)(possible outcome of event 1) + (probability of event 2)( possible
outcome of event 2)…+ (probability of event n)( possible outcome of event n)

1. Find the expected value for the outcome of the roll of a fair die with 6 sides.

2. Find the expected value for the number of girls for a family with three children.

3. An automobile insurance company has determined the probabilities for various claim amounts
for drivers ages 16 through 21, shown in the table.
Probabilities for Auto Claims
Amount of Claim a. Calculate the expected value and describe what this means in
(to the nearest practical terms.
$2000) Probability
$0 0.70
$2000 0.15
$4000 0.08
$6000 0.05 b. How much should the company charge as an average premium
$8000 0.01 so that it does not lose or gain money on its claim costs?
$10,000 0.01
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4. You are a realtor considering listing a $500,000 house. The cost of advertising and providing food for
other realtors during open showings is anticipated to cost you $5000. The house is quite unusual and you
are given a four-month listing. If the house is unsold after four months, you lose the listing and receive
nothing. You anticipate that the probability you sell your own listed house is 0.3, the probability that
another agent sells your listing is 0.2, and the probability that the house is unsold after 4 months is 0.5.
If you sell your own listed house, the commission is a hefty $30,000. If another realtor sells your listing,
the commission is $15,000. The bottom line: You will not take the listing unless you anticipate earning at
least $6000. Should you list the house?

Fair Game – the expected value is ______.

5. A game is played using one die. If the die is rolled and shows 1, 2, or 3, the player wins nothing. If the
die shows 4 or 5, the player wins $3. If the die shows 6, the player wins $9. If there is a charge of
$1 to play the game, what is the game’s expected value? Describe what this means in practical terms.

6. One way to bet in roulette is to place $1 on a single number. If the ball lands on that number, you are
awarded $35 and get to keep the $1 that you paid to play the game. If the ball lands on any one of
the other 37 slots, you are awarded nothing and the $1 that you bet is collected. Find the expected
value for playing roulette if you bet $1 on number 20. Describe what this means.

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