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Alice, Bob, and Confucius are bored during recess, so they decide to play a new game. Each of them puts a dollar in the pot, and each tosses a coin. Alice wins if the coins land all heads or all tails. Bob wins if two heads and one tail land, and Confucius wins if one head and two tails land. The coins are fair, and the winner receives a net payment of $2 ($3 - $1 = $2), and the losers lose their $1.What is Confucius' expected payoff? Round your answer to three decimal places

Question

Alice, Bob, and Confucius are bored during recess, so they decide to play a new game. Each of them puts a dollar in the pot, and each tosses a coin. Alice wins if the coins land all heads or all tails. Bob wins if two heads and one tail land, and Confucius wins if one head and two tails land. The coins are fair, and the winner receives a net payment of 2(2 (3 - 1=1 = 2), and the losers lose their $1.What is Confucius' expected payoff? Round your answer to three decimal places

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Solution

The expected payoff for Confucius can be calculated by multiplying the probability of his winning scenario by the payoff of that scenario, and then subtracting the product of the probability of his losing scenarios and the loss from those scenarios.

  1. Calculate the probability of Confucius' winning scenario: Confucius wins if one head and two tails land. There are 3 ways this can happen (HTT, THT, TTH), and each has a probability of (1/2)^3 = 1/8. So, the total probability of Confucius winning is 3*(1/8) = 3/8.

  2. Calculate the payoff for Confucius' winning scenario: If Confucius wins, he receives a net payment of $2.

  3. Calculate the probability of Confucius' losing scenarios: Confucius loses if any other combination of heads and tails lands. There are 5 other possible combinations (HHH, HHT, HTH, THH, TTT), and each has a probability of (1/2)^3 = 1/8. So, the total probability of Confucius losing is 5*(1/8) = 5/8.

  4. Calculate the loss for Confucius' losing scenarios: If Confucius loses, he loses his $1.

  5. Calculate Confucius' expected payoff: Expected payoff = (probability of winning * payoff of winning) - (probability of losing * loss of losing) Expected payoff = (3/8 * 2)(5/82) - (5/8 * 1) Expected payoff = 0.750.75 - 0.625 Expected payoff = $0.125

So, Confucius' expected payoff is $0.125, or 12.5 cents.

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