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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 (e.g. 1.234)

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 (e.g. 1.234)

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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 in those scenarios.

  1. Calculate the total number of outcomes: Since each person can either get a head or a tail, and there are three people, the total number of outcomes is 2^3 = 8.

  2. Calculate the number of winning outcomes for Confucius: Confucius wins if one head and two tails land. This can happen in three ways (HTT, THT, TTH). So, the number of winning outcomes for Confucius is 3.

  3. Calculate the probability of Confucius winning: This is the number of winning outcomes divided by the total number of outcomes, which is 3/8 = 0.375.

  4. Calculate the number of losing outcomes for Confucius: This is the total number of outcomes minus the number of winning outcomes, which is 8 - 3 = 5.

  5. Calculate the probability of Confucius losing: This is the number of losing outcomes divided by the total number of outcomes, which is 5/8 = 0.625.

  6. Calculate Confucius' expected payoff: This is the product of the probability of winning and the payoff of winning, minus the product of the probability of losing and the loss of losing. The payoff of winning is 2,andthelossoflosingis2, and the loss of losing is 1. So, the expected payoff is (0.375 * 2) - (0.625 * 1) = 0.125.

So, Confucius' expected payoff is $0.125.

This problem has been solved

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