Question

A manufacturer plans on building a better mousetrap. There is a 60% chance the mouse trap will produce a profit of $200,000 for the company, a 20% chance of a $100,000 profit, and a 20% chance the company will lose $200,000.

Based on this information, should the company build the mousetrap?
A) The expected value is $70,000, so the company should build the mousetrap.
B) The expected value is $85,000, so the company should build the mousetrap.
C) The expected value is $100,000, so the company should build the mousetrap.
D) The expected value is -$70,000, so the company should not build the mousetrap.

Answer 1

The answer is C. The expected value is $100,000, so the company should build the mousetrap.

Answer 2

Expected value E(x) = 0.6(200,000) + 0.2(100,000) - 0.2(200,000) = 120,000 + 20,000 - 40,000 = 100,000

Therefore, the expected value is $100,000, so the company should build the mousetrap.