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.If John decides to expand based on expected value,it means that:
A) the difference in expected earnings from expanding versus not must exceed $150,000.
B) the sum of expected earnings from expanding and from not must exceed $150,000.
C) the difference in expected earnings from expanding versus not must not exceed $150,000.
D) his expected earnings from expansion must exceed $150,000.

Question

Quizplus · Accepted Answer

The expected value of expanding is 0.3 * 100,000 + 0.3 * 300,000 + 0.4 * 500,000 - 150,000 = 270,000. The expected value of not expanding is 0.5 * 100,000 + 0.5 * 300,000 = 200,000. The difference in expected earnings is 270,000 - 200,000 = 70,000. This is greater than $150,000, so John should expand.

John Is Trying to Decide Whether to Expand His Business