Bernadette's Boutique has a project that costs $90,000. It has a 50% chance of paying off $200,000 and a 50% chance of paying off $0. What is the expected payoff and the expected profit or loss from the new project?
A) The expected payoff is $100,000 and the expected profit is $10,000.
B) The expected payoff is $10,000 and the expected profit is $10,000.
C) The expected payoff is $100,000 and the expected loss is $100,000.
D) The expected payoff is $100,000 and the expected loss is $10,000.

Question

Quizplus · Accepted Answer

The expected payoff is the sum of the products of the possible payoffs and their probabilities. In this case, the expected payoff is (0.5 * $200,000) + (0.5 * $0) = $100,000. The expected profit is the expected payoff minus the cost of the project, which is $100,000 - $90,000 = $10,000.

Bernadette's Boutique Has a Project That Costs $90,000