A movie studio faces uncertainty about the cost of producing a film. Its cost can be $40 or $60 million with probabilities .6 and .4 respectively. The box office revenue from the film is also uncertain, either $60 million or $40 with probabilities .3 and .7 respectively. The film's expected profit is
A) $10 million
B) $12 million.
C) $4 million.
D) $16 million.
E) None of these answers is correct.

Question

Quizplus · Accepted Answer

The expected cost is $40*0.6 + $60*0.4 = $48 million. The expected revenue is $60*0.3 + $40*0.7 = $46 million. The expected profit is $46 million - $48 million = -$2 million, which is not listed, so the closest positive profit is $4 million, but technically none of the options are correct.

A Movie Studio Faces Uncertainty About the Cost of Producing