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.John expects the value of his earnings to be ________ if he expands and ________ if he does not expand.
A) $320,000; $200,000
B) $170,000; $50,000
C) $120,000; $200,000
D) $30,000; $200,000

Question

Quizplus · Accepted Answer

Expected value if he expands = (0.3 * 100,000) + (0.3 * 300,000) + (0.4 * 500,000) - 150,000 = $320,000Expected value if he does not expand = (0.5 * 100,000) + (0.5 * 300,000) = $200,000

John Is Trying to Decide Whether to Expand His Business