Question

Bratt's Bed and Breakfast, in a small historic New England town, must decide how to subdivide remodel) the large old home that will become an inn. There are three alternatives: Option A would modernize all baths and combine rooms, leaving the inn with four suites, each suitable for two to four adults. Option B would modernize only the second floor; the results would be six suites, four for two to four adults, and two for two adults only. Option C (the status quo option) leaves all walls intact. In this case,there are eight rooms available, but only two are suitable for four adults, and four rooms will not have private baths. Below are the details of profit and demand patterns that will accompany each option. Which option has the highest expected value? Annual profit under various demand patterns High p Lowp A (Modernize all) $90,000 .5 $25,000 .5 B (Modernize 80,0004 $70,000 6 2nd) C (Status Quo) $60,000 3 $55,000 .7 Option A Option B Option C Options B and C have the same value so you can choose either one Options A and C have the same value so you can choose either one

Answer 1

Option (B) is correct.

Step-by-step explanation:

Expected value for option A:

= High amount × Probability + Low amount × Probability

= $90,000 × 0.5 + $25,000 × 0.5

= $57,500

Expected value for option B:

= High amount × Probability + Low amount × Probability

= $80,000 × 0.4 + $70,000 × 0.6

= $74,000

Expected value for option C:

= High amount × Probability + Low amount × Probability

= $60,000 × 0.3 + $55000 × 0.7

= $56,500

Therefore, option (B) would be the answer.