John is trying to decide whether to expand his business or not. If he continues his business as it is, with no expansion, there is a 50 percent chance his revenue will be $100,000 and a 50 percent chance his revenue will be $300,000. If he does expand, it will cost him $150,000, and there is a 30 percent chance his revenue will be $100,000; a 30 percent chance his revenue will be $300,000; and a 40 percent chance his revenue will be $500,000.John should expect that the value of his revenue will be ________ if he expands and ________ if he does not expand.
A)$320,000; $200,000
B)$170,000; $50,000
C)$120,000; $200,000
D)−$30,000; $200,000

Question

Quizplus · Accepted Answer

If he does not expand, the expected revenue is (0.5 * $100,000) + (0.5 * $300,000) = $200,000. If he expands, the expected revenue before costs is (0.3 * $100,000) + (0.3 * $300,000) + (0.4 * $500,000) = $320,000. The cost of expansion is $150,000, so the expected value of his revenue after expansion costs would still be $320,000, as the question asks for the value of revenue, not profit.

John Is Trying to Decide Whether to Expand His Business