Example:expected value Suppose we offer a starving graduate student a choice between two possible options,a lottery and a certain payout: A:a lottery that awards $500 with probability o.5 and so with probability o.5. B:a check for $250 with probability 1. The expected value of both the lottery and the certain payout is $250: E[I]=pIs+(1-p)I E[A]=.5(500)+.5(o)=$250 E[B]=1(250)=250 Bhattacharya,Hyde and Tu-HealthEconomicsBhattacharya, Hyde and Tu – Health Economics Example: expected value  Suppose we offer a starving graduate student a choice between two possible options, a lottery and a certain payout: A: a lottery that awards $500 with probability 0.5 and $0 with probability 0.5. B: a check for $250 with probability 1.  The expected value of both the lottery and the certain payout is $250: E[I] = p IS + (1- p) IH E[A] = .5(500) + .5(0) = $250 E[B] = 1(250) = $250