The management of MultiVision, a cable TV company, intends to submit a bid for the cable television rights in one of two cities, A or B. If the company obtains the rights to city A, the probability of which is 0.3, the estimated profit over the next 10 yr is $10 million; if the company obtains the rights to city B, the probability of which is 0.4, the estimated profit over the next 10 yr is $7 million. The cost of submitting a bid for rights in city A is $300,000 and that of city B is $300,000.
By comparing the expected profits for each venture, determine whether the company should bid for the rights in city A or city B.
A) City A
B) City B

Question

The management of MultiVision, a cable TV company, intends to submit a bid for the cable television rights in one of two cities, A or B. If the company obtains the rights to city A, the probability of which is 0.3, the estimated profit over the next 10 yr is $10 million; if the company obtains the rights to city B, the probability of which is 0.4, the estimated profit over the next 10 yr is $7 million. The cost of submitting a bid for rights in city A is $300,000 and that of city B is $300,000. ​
By comparing the expected profits for each venture, determine whether the company should bid for the rights in city A or city B.
A) City A
B) City B

Quizplus · Accepted Answer

Expected profit from bidding in city A = 0.3 x 10 million - 0.3 x 300,000 = $2,910,000
Expected profit from bidding in city B = 0.4 x 7 million - 0.4 x 300,000 = $2,620,000

Therefore, the company should bid for the rights in city A as it has a higher expected profit.

The Management of MultiVision, a Cable TV Company, Intends to Submit