Question

You are given the four payout option show below for a coin toss. If you are using a maximin strategy, which option do you choose?

		Heads you win $500, tails you lose $100
		Heads you win $1,000, tails you lose $110
		Heads you win $50, tails you lose $25
		Heads you win $5, tails you lose $0

Answer 1

Solution

When a coin is tossed,there are 2 possibilities : either getting heads or tails.So the chance/probability of getting head (or) a tail is 1/2 i.e., 0.5 or 50%

Here it is give that you win if you get a head and loose when get a tail.The options for maximum strategy are as below

1. 50% of winning $500 and 50% of loosing $100

2.50% of winning $1000 and 50% of loosing $100

3.50% of winning $50 and 50% of loosing $100

4.50% of winning $5 and 50% of loosing $100

The answer is 2.Heads you win $1,000, tails you lose $110 because according to profit maximizing strategy,you need to choose the oprtion which will result in higher profit.In case of all the options,the chances of winning are the same so select the choice where we can get the highest profit if we win i.e., that is 2.

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