expected value of x
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Transcript expected value of x
SECTION 11-5
• Expected Value
Slide 11-5-1
EXPECTED VALUE
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•
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•
Expected Value
Games and Gambling
Investments
Business and Insurance
Slide 11-5-2
EXPECTED VALUE
Children in third grade were surveyed and told to pick
the number of hours that they play electronic games
each day. The probability distribution is given below.
# of Hours x
Probability P(x)
0
.3
1
.4
2
.2
3
.1
Slide 11-5-3
EXPECTED VALUE
Compute a “weighted average” by multiplying
each possible time value by its probability and
then adding the products.
0(.3) 1(.4) 2(.2) 3(.1) 1.1
1.1 hours is the expected value (or the
mathematical expectation) of the quantity of
time spent playing electronic games.
Slide 11-5-4
EXPECTED VALUE
If a random variable x can have any of the values
x1, x2 , x3 ,…, xn, and the corresponding
probabilities of these values occurring are
P(x1), P(x2), P(x3), …, P(xn), then the expected
value of x is given by
E ( x) x1 P( x1 ) x2 P( x2 )
xn P( xn ).
Slide 11-5-5
EXAMPLE: FINDING EXPECTED VALUE
Find the expected number of boys for a three-child
family. Assume girls and boys are equally likely.
Solution
S = {ggg, ggb, gbg,
bgg, gbb, bgb, bbg,
bbb}
The probability
distribution is on
the right.
# Boys
x
0
1
2
3
Probability
P(x)
1/8
3/8
3/8
1/8
Product
x P( x)
0
3/8
6/8
3/8
Slide 11-5-6
EXAMPLE: FINDING EXPECTED VALUE
Solution (continued)
The expected value is the sum of the third column:
3 6 3 12
0
8 8 8 8
3
1.5.
2
So the expected number of boys is 1.5.
Slide 11-5-7
EXAMPLE: FINDING EXPECTED
WINNINGS
A player pays $3 to play the following game: He rolls
a die and receives $7 if he tosses a 6 and $1 for
anything else. Find the player’s expected net
winnings for the game.
Slide 11-5-8
EXAMPLE: FINDING EXPECTED
WINNINGS
Solution
The information for the game is displayed below.
Net P(x)
x P( x)
$1
–$2
5/6
–$10/6
$7
$4
1/6
$4/6
Die Outcome
Payoff
1, 2, 3, 4, or 5
6
Expected value: E(x) = –$6/6 = –$1.00
Slide 11-5-9
GAMES AND GAMBLING
A game in which the expected net winnings are
zero is called a fair game. A game with negative
expected winnings is unfair against the player. A
game with positive expected net winnings is
unfair in favor of the player.
Slide 11-5-10
EXAMPLE: FINDING THE COST FOR A
FAIR GAME
What should the game in the previous example
cost so that it is a fair game?
Solution
Because the cost of $3 resulted in a net loss of $1,
we can conclude that the $3 cost was $1 too high. A
fair cost to play the game would be $3 – $1 = $2.
Slide 11-5-11
INVESTMENTS
Expected value can be a useful tool for
evaluating investment opportunities.
Slide 11-5-12
EXAMPLE: EXPECTED INVESTMENT
PROFITS
Mark is going to invest in the stock of one of the two
companies below. Based on his research, a $6000
investment could give the following returns.
Company ABC
Profit or Probability
Loss x
P(x)
–$400
.2
$800
.5
$1300
.3
Company PDQ
Profit or
Probability
Loss x
P(x)
$600
.8
1000
.2
Slide 11-5-13
EXAMPLE: EXPECTED INVESTMENT
PROFITS
Find the expected profit (or loss) for each of the
two stocks.
Solution
ABC: –$400(.2) + $800(.5) + $1300(.3) = $710
PDQ: $600(.8) + $1000(.2) = $680
Slide 11-5-14
BUSINESS AND INSURANCE
Expected value can be used to help make
decisions in various areas of business, including
insurance.
Slide 11-5-15
EXAMPLE: EXPECTED LUMBER
REVENUE
A lumber wholesaler is planning on purchasing a
load of lumber. He calculates that the probabilities
of reselling the load for $9500, $9000, or $8500 are
.25, .60, and .15, respectfully. In order to ensure an
expected profit of at least $2500, how much can he
afford to pay for the load?
Slide 11-5-16
EXAMPLE: EXPECTED LUMBER
REVENUE
Solution
The expected revenue from sales can be found below.
Income x
P(x)
x P( x)
$9500
.25
$2375
$9000
.60
$5400
$8500
.15
$1275
Expected revenue: E(x) = $9050
Slide 11-5-17
EXAMPLE: EXPECTED LUMBER
REVENUE
Solution (continued)
profit = revenue – cost or cost = profit – revenue
To have an expected profit of $2500, he can pay up to
$9050 – $2500 = $6550.
Slide 11-5-18