Expected value while fishing
You and your friend Jeremy are fishing in a pond that contains 10 trout and 10 sunfish. Each time one of you catches a fish, you release back into the water. Jeremy offers you the choice of two different bets.
Bet 1: If the next 3 fish that he catches are all sunfish, you will pay him $100, otherwise he will pay you $20.
Bet 2: If you catch at least 2 sunfish of the next 3 fish that you catch, he will pay you $50, otherwise you will pay him $25.
What is your expected value from Bet 1?
What is your expected value from Bet 2?
Comparing insurance with expected value
Paul has an option between a high deductible or a low deductible insurance plan.
If Paul chooses the low deductible plan, he will have to pay the first $1000 of any medical costs. The low deductible plan costs $8000 per year.
If Paul chooses the high deductible plan, he will have to pay the first $2500 of any medical costs. The low deductible plan costs $8700 per year.
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