An item costs 200 currency from a vendor, but it is sold cheaper on the market; however, buying it from the vendor has a 2% chance to give you both your regular item and an extra item worth 1750 currency. At what currency level should one buy the item from the vendor over the market? (Please include formulas, I'd like to understand the theory)

Question

An item costs 200 currency from a vendor, but it is sold cheaper on the market; however, buying it from the vendor has a 2% chance to give you both your regular item and an extra item worth 1750 currency.  At what currency level should one buy the item from the vendor over the market?  (Please include formulas, I'd like to understand the theory)

anonymous · Answer

Yea, I'd like to know how to do this myself.

anonymous · Answer

@mathematiciansomeday Can you help?

anonymous · Answer

the expected value for the purchase from the vendor cost is $200-0.02(1750)=165;  the utility of buying is dependable upon model of taking a risk . Generally speaking, it is really worth is to buy it from the market if it is less than 165.