Question

A company is considering making a new product. They estimate the probability that the new product will be successful is 0.75. If it is successful it would generate $240,000 in profit. The cost to develop the product is $196,000. Use the revenue (profit – cost) and expected value to decide whether the company should make this new product.

Answer 1

You take the probability of success (and the revenue generated by it) and the probability of failure (and the cost associated with trying it) and get an expected value:

aP(a) + bP(b)

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