Reference no: EM131682262
Question: Consider the following simplified scenario based on Who Wants to Be a Millionaire?, a game show in which the contestant answers multiple-choice questions that have 4 choices per question. The contestant (Fred) has answered 9 questions correctly already, and is now being shown the 10th question. He has no idea what the right answers are to the 10th or 11th questions are. He has one "lifeline" available, which he can apply on any question, and which narrows the number of choices from 4 down to 2. Fred has the following options available.
(a) Walk away with $16,000.
(b) Apply his lifeline to the 10th question, and then answer it. If he gets it wrong, he will leave with $1,000. If he gets it right, he moves on to the 11th question. He then leaves with $32,000 if he gets the 11th question wrong, and $64,000 if he gets the 11th question right.
(c) Same as the previous option, except not using his lifeline on the 10th question, and instead applying it to the 11th question (if he gets the 10th question right). Find the expected value of each of these options. Which option has the highest expected value? Which option has the lowest variance?
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