Before the 2014 World Series, you bet on which team will win. Suppose the National League (NL) team will win with probability 0.6 and the American League (AL) team will win with probability 0.4. Your net payoff contingent on which team you bet on and which one actually wins is:
Bet on NL Team Bet on AL Team
Outcome NL team wins 100 -25
(prob. = 0.6)
AL team wins -25 100
(prob. = 0.4)
a. Which team will you bet on without further information? What is your expected payoff?
b. Suppose your friend could predict the outcome of this World Series with 100% accuracy. What would be the value of your friend's "tip" to you?
c. If your friend could only predict the outcome with 75% accuracy, how much would his "tip" be worth to you?