Question

An investor has purchased stock in a firm. The investor believes that , at the end of the year, there is

0.10 probability that the stock will show a $6,000 profit,
0.30 probability that the stock will show a $4000 profit and
0.60 probability that the stock will show a $2000 loss.
The expected profit is $600.
If the best profit increases by $1000 from $6000 to $7000, the expected profit?
A. Will remain unchanged
B. Will increase by $10
C. Will increase by $100
D. Will increase by a $1000
E. None of the above

Answer 1

C) Will increase by $100

Step-by-step explanation:

We can calculate the expected profit by adding:

$6,000 x 10% = $600

$4,000 x 30% = $1,200

-$2,000 x 60% = -$1,200

expected profit = $600

If best profit increases to $,7000 then the new expected profit will be:

$7,000 x 10% = $700

$4,000 x 30% = $1,200

-$2,000 x 60% = -$1,200

expected profit = $700

The new expected profit is $100 larger than the previous expected profit.