Bob's best response to a revealed coin bias
Question
Alice and Bob each choose the heads probability of their own coin and then each flip once. If both coins show heads, Alice pays Bob $6; if both show tails, Alice pays Bob $4; if they differ, Bob pays Alice $5. Alice must announce her heads probability before Bob chooses his, . If , Bob has positive expected profit exactly when for a reduced fraction . What is ?
Short answer
. Weighting Bob's payoffs , , by the outcome probabilities and collecting terms, his expected profit is , linear in . At this becomes , which is positive exactly when .
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Open the worked solutionLessons behind this question
- Conditional Probability, Total Probability, and Bayes' Rule
- Counting and Combinatorics
- Worked Examples — Probability Trees, Monty Hall, and Bayesian Updating
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