If he feels the chances of low, normal, and high precipitation are 30%, 20%, and 50% respectively, what are expected long-run profits for the alternative he will select?
A)$140,000
B)$170,000
C)$285,000
D)$305,000
E)$475,000

Question

Quizplus · Accepted Answer

To calculate the expected long-run profits, we need to multiply the profits of each alternative with their respective probability of occurrence and sum them up.

Expected long-run profits for Alternative 1: 
= (0.3 * $100,000) + (0.2 * $200,000) + (0.5 * -$50,000)
= $30,000 + $40,000 - $25,000
= $45,000

Expected long-run profits for Alternative 2:
= (0.3 * $50,000) + (0.2 * $150,000) + (0.5 * $250,000)
= $15,000 + $30,000 + $125,000
= $170,000

Therefore, the best choice is Alternative 2 (B) with expected long-run profits of $170,000.

If He Feels the Chances of Low, Normal, and High