A diamond merchant has a chance to buy one of 4 diamonds and wants to sell it immediately. One costs only $1000, but he has a 90% chance of getting $5000 for it (or not selling it at all). The second costs $10,000, and he has a 60% change of selling it for $25,000 (or not selling it at all). The third costs $20,000, but he has a 50% chance of selling it for $60,000 (or not selling it at all). The last diamond costs $50,000, but he has a 1% chance of selling it for $1,000,000 (or not selling it at all). Which diamond gives him the best expected value?
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options are :
the one for $1000
the one for $10,000
the one for $20,000
the one for $50,000
First convert the percentages to decimals, for example 90% converts to a probability of 0.9.
Then multiply the profit by the probability to get the expected value.
Cost Profit Probability Expected Value
$1000 5000 - 1000 = $4000 0.9 $4000 * 0.9 = $3600
Now you can complete the table to find the correct choice of answer.