John is trying to decide whether to expand his business or not. If he continues his business as it is, with no expansion, there is a 50 percent chance his revenue will be $100,000 and a 50 percent chance his revenue will be $300,000. If he does expand, it will cost him $150,000, and there is a 30 percent chance his revenue will be $100,000; a 30 percent chance his revenue will be $300,000; and a 40 percent chance his revenue will be $500,000.If John decides to expand based on expected value, it means that: A)the difference in expected revenue from expanding versus not expanding must be greater than $150,000. B)the expected revenue from not expanding must be less than $150,000. C)the difference in expected revenue from expanding versus not expanding must be less than $150,000. D)the expected revenue from expanding must be greater than $150,000.

Question

Quizplus · Accepted Answer

The expected revenue from expanding must outweigh the cost of expansion ($150,000) plus the expected revenue from not expanding for the decision to be justified based on expected value.

John Is Trying to Decide Whether to Expand His Business