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Choosing a number when the larger pays the smaller

Question

Alice's number YY is uniform on the integers 1,…,1001,\dots,100. Bob, not knowing YY, chooses an integer xx in the same range. If the numbers differ, the holder of the larger one pays the holder of the smaller one an amount equal to the smaller number; equal numbers mean no payment. With Bob choosing optimally, what is his expected gain?

Short answer

16.8316.83. If Y<xY<x Bob pays YY, averaging x2\tfrac x2; if Y>xY>x he receives xx. So his expected gain is x−1100(−x2)+100−x100x=201x−3x2200\tfrac{x-1}{100}\big(-\tfrac x2\big)+\tfrac{100-x}{100}x=\tfrac{201x-3x^2}{200}, a parabola peaking at x=33.5x=33.5. Both x=33x=33 and x=34x=34 give 3366200=16.83\tfrac{3366}{200}=16.83.

Adapted from QuantQuestions.io; question and answer rewritten by SelfMadeQuant.com.

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