Exercises: Evaluate and Compare Strategies Using Expected Values
Work through each section in order. For every comparison, FIRST state the direction: an expected COST means lower is better; an expected PAYOFF means higher is better. Model each strategy as its own distribution, compute its expected value, then compare the totals. For insurance problems, remember expected cost = premium + expected out-of-pocket. Show your arithmetic.
Warm-Up: Direction and Single-Option Expected Value
These problems review computing one expected value and stating the cost/payoff direction.
To compare two competing strategies, you model each one as its own ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ distribution, compute each strategy's ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ ̲ , and then compare those values. (First blank: "payoff or cost". Second and third blanks: the two-word name of the average you compute.)