Question

A business evaluates a proposed venture as follows. It stands to make a profit of $10,000 with probability 3/20, to make a profit of $5,000 with probability 9/20, to break even with probability 5/20, and to lose $5,000 with probability 3/20. The expected profit in dollars is (A) $ 1,500 (B) $0 (C) $3,000 (D) $3,250 (E) $-1,500 (loss)

Answer 1

The expected profit for the business is 3,000.

Step-by-step explanation:

To find the expected profit, we multiply the profit of each outcome by its respective probability and sum them up.

Expected Profit = (Profit1 * Probability1) + (Profit2 * Probability2) + (Profit3 * Probability3) + (Profit4 * Probability4)

Expected Profit = (10,000 * 3/20) + (5,000 * 9/20) + (0 * 5/20) + (-5,000 * 3/20)

Expected Profit = 1,500 + 2,250 + 0 + (-750)

Expected Profit = 3,000

Answer 2

The expected profit for the business venture is calculated by multiplying each potential profit outcome by its probability and adding them together, resulting in $3,000.

Step-by-step explanation:

The question involves calculating the expected profit for a business venture given the different probabilities and outcomes. The expected profit (E) is calculated by multiplying each outcome by its respective probability and summing up the products:

E = ($10,000 × 3/20) + ($5,000 × 9/20) + ($0 × 5/20) + (-$5,000 × 3/20)

E = $1,500 + $2,250 + $0 - $750

E = $3,000

So, the expected profit for the business venture is $3,000, which corresponds to option (C).