The owner of Tastee Cookies needs to decide whether to lease a small, medium, or large new retail outlet. She estimates that monthly profits will vary with demand for her cookies as follows: For what range of probability that demand will be high, will she decide to lease the medium facility?
A) 0-.25
B) 0-.33
C) .25-.5
D) .33-1
E) .5-1

Question

The owner of Tastee Cookies needs to decide whether to lease a small, medium, or large new retail outlet. She estimates that monthly profits will vary with demand for her cookies as follows:  For what range of probability that demand will be high, will she decide to lease the medium facility?
A) 0-.25 
B) 0-.33 
C) .25-.5 
D) .33-1 
E) .5-1

Quizplus · Accepted Answer

To determine the best choice, we need to compare the expected profits for each facility given the range of probabilities that demand will be high.

For the small facility, the expected profits are:
- (0.2)(1500) + (0.8)(800) = $1040

For the medium facility, the expected profits are:
- (0.2)(2400) + (0.8)(1200) = $1680

For the large facility, the expected profits are:
- (0.2)(3300) + (0.8)(1600) = $2080

Therefore, the medium facility is the best choice if the probability of high demand falls within the range that gives us the highest expected profits, which is 0.25-0.5. Within this range, the expected profits for the medium facility ($1680) are higher than the expected profits for the small ($1040) and large ($2080) facilities.

The Owner of Tastee Cookies Needs to Decide Whether to Lease