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 were to expand,which of the following is true?
A) John's expected earnings are $50,000 less than if he didn't expand.
B) John can expect to earn $120,000 more by expanding, but that is less than the cost of expansion, $150,000.
C) John can expect to earn $120,000 more by expanding and therefore made the most profitable decision.
D) All of these statements are true.

Question

Quizplus · Accepted Answer

The expected earnings without expansion are $200,000. With expansion, the expected earnings are $320,000, which is $120,000 more. However, the cost of expansion is $150,000, making the net gain negative.

John Is Trying to Decide Whether to Expand His Business