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 he will earn $100,000 and a 50 percent chance he will earn $300,000.If he does expand,there is a 30 percent chance he will earn $100,000,a 30 percent chance he will earn $300,000 and a 40 percent chance he will earn $500,000.It will cost him $150,000 to expand.To make the best decision,John should compare:
A) the expected value of his earnings if he doesn't expand with the expected value of his earnings if he does expand.
B) the difference in expected earnings if he does or does not expand to the cost of expansion.
C) the expected value of his earnings if he expands to the cost of expansion.
D) None of these statements is true.

Question

Quizplus · Accepted Answer

To make the best decision, John needs to consider the expected value of his earnings with and without expansion and compare it with the cost of expansion. The difference between the expected earnings with and without expansion is calculated by subtracting the expected earnings without expansion from the expected earnings with expansion. If this difference is greater than the cost of expansion, then John should expand. Otherwise, he should continue his business as it is. Therefore, option B is the correct choice.

John Is Trying to Decide Whether to Expand His Business