QUESTION: The lottery problem is a pretty commonly asked question in statistics

Question

QUESTION: The lottery problem is a pretty commonly asked question in statistics and economics courses (there is a similar question in the end of chapter I7). When I say on the news this week (11/19/16) that an individual in NJ won the Powerball Lottery, I figured to assign the lottery problem.

A.

What must the jackpot be before the expected payoff is worth your $2 bet? To make this question a bit easier, let’s make a couple assumptions: 1)the probability of winning the jackpot it 1in 300 million, 2) you have to pay 60% of the jackpot in taxes (I think this is what it is in TN), 3) there are no other winners, 4) you are risk neutral, and 5) other than the Jackpot there are no other prizes (so ignore all the other prizes like when you get 5 out of 6 numbers correct).

Explanation / Answer

for probabilty of winning a jackpot =1/300000000

let us say jackpot money =x

hence expected payofff =0.4x/300000000 which must be equal to 2

hence x =300000000*2/0.4 =1500000000 =1500 million

Note: According to chegg guidelines we do only one question

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