A former politician,who is now the owner of an Ottawa consulting firm,is trying to decide whether to hire one,two,or three consultants.He estimates that profits next year (in thousands of dollars)will vary with demand for his consulting services as follows: If he feels the chances of low,medium,and high demand are 50%,20%,and 30%,respectively,what are the expected annual profits for the number of consultants he will decide to hire?

Question

A former politician,who is now the owner of an Ottawa consulting firm,is trying to decide whether to hire one,two,or three consultants.He estimates that profits next year (in thousands of dollars)will vary with demand for his consulting services as follows:  If he feels the chances of low,medium,and high demand are 50%,20%,and 30%,respectively,what are the expected annual profits for the number of consultants he will decide to hire?

Quizplus · Accepted Answer

To determine the expected annual profits for each option, we must find the weighted average of the profits for each level of demand, using the given probabilities:

For one consultant:
Expected profit = (0.5 x 30) + (0.2 x 80) + (0.3 x 50) = $45,500

For two consultants:
Expected profit = (0.5 x 50) + (0.2 x 100) + (0.3 x 70) = $62,000

For three consultants:
Expected profit = (0.5 x 60) + (0.2 x 120) + (0.3 x 90) = $73,500

Therefore, the best choice would be to hire three consultants, with an expected annual profit of $73,500. However, since this option is not given in the answer choices, the closest one is C) $70,000, which corresponds to hiring two consultants.

A Former Politician,who Is Now the Owner of an Ottawa