In the final round of a TV game show, contestants have a chance to increase their...

In the final round of a TV game show, contestants have a chance to increase their current winnings of $1 million to $2 million. If they are wrong, their prize is decreased to $500,000. A contestant thinks his guess will be right 50% of the time. Should he play? What is the lowest probability of a correct guess that would make playing profitable?

Expert Solution

We need to calculate the expected value of the increase and decrease in the prize money:

So as the expected value is positive, the contestant should answer

To coalculate the minimum probablity to make playing profitable, we need to calculate the probability where Expected value = 0

So the minimum probability of success for accepting the project should be 0.33 or 33% as if it is lower, the expected value will be negative

Rahul Sunny answered 2 years ago

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