A firm supplies aircraft engines to the government and to private firms.It must decide between two mutually exclusive contracts.If it contracts with a private firm,its profit will be $2 million,$0.7 million,or -$0.5 million with probabilities 0.25,0.41,and 0.34,respectively.If it contracts with the government,its profit will be $4 million or -$2.5 million with respective probabilities 0.45 and 0.55.Which contract offers the greater expected profit or loss?

Question

Quizplus · Accepted Answer

The expected profit for the private contract is (0.25 * $2 million) + (0.41 * $0.7 million) + (0.34 * -$0.5 million) = $0.175 million. The expected profit for the government contract is (0.45 * $4 million) + (0.55 * -$2.5 million) = $0.175 million. Both contracts offer the same expected profit, but since the question asks for the greater expected profit or loss, the private contract offers a greater expected profit due to its positive expected value.

A Firm Supplies Aircraft Engines to the Government and to Private