Assume that one of two possible outcomes will follow a decision. One outcome yields a $75 payoff and has a probability of 0.3; the other outcome has a $125 payoff and has a probability of 0.7. In this case the expected value is:
A) $85.
B) $60.
C) $110.
D) $35.

Question

Quizplus · Accepted Answer

To calculate the expected value, we use the formula: 
Expected value = (probability of outcome 1 x value of outcome 1) + (probability of outcome 2 x value of outcome 2)

In this case, the expected value is:
(0.3 x 75) + (0.7 x 125) = 22.5 + 87.5 = $110

Therefore, the best choice is to choose the option with the higher expected value, which is $110.

Assume That One of Two Possible Outcomes Will Follow a Decision