A firm is making production plans for next quarter,but the manager does not know what the price of the product will be next month.She believes there is a 30 percent chance price will be $500 and a 70 percent chance price will be $750.The four possible profit outcomes are: Which option has the higher expected profit?
A)Option A
B)Option B
C)Both Options have the same expected profit
D)cannot calculate expected profit with the given information

Question

A firm is making production plans for next quarter,but the manager does not know what the price of the product will be next month.She believes there is a 30 percent chance price will be $500 and a 70 percent chance price will be $750.The four possible profit outcomes are:  Which option has the higher expected profit?
A)Option A 
B)Option B 
C)Both Options have the same expected profit 
D)cannot calculate expected profit with the given information

Quizplus · Accepted Answer

To calculate the expected profit for each option, we need to multiply the profit of each outcome by its respective probability and add the products.

For Option A: 
Expected profit = (0.3 x $300) + (0.7 x $100) = $210

For Option B: 
Expected profit = (0.3 x $500) + (0.7 x $250) = $325

Therefore, Option B has the higher expected profit and is the better choice.

A Firm Is Making Production Plans for Next Quarter,but the Manager