Question

A store specializing in mountain bikes is to open in one of two malls. If the first mall is selected, the store anticipates a yearly profit of $825,000 if successful and a yearly loss of $275,000 otherwise. The probability of success is 1/2. If the second mall is selected, it is estimated that the yearly profit will be $550,000 if successful; otherwise, the annual loss will be $165,000. The probability of success at the second mall is 3/4.

a) Expected profit is $275,000.
b) Expected profit is $550,000.
c) Expected profit is $687,500.
d) Expected profit is $825,000.

Answer 1

The expected profit can be calculated by multiplying each outcome by its probability and summing the results. For the first mall, the expected profit is $550,000. For the second mall, the expected profit is $412,500. The overall expected profit is $962,500.

Step-by-step explanation:

The expected profit can be calculated by multiplying each possible outcome by its corresponding probability and summing the results.

For the first mall, the expected profit is ($825,000 x 1/2) + ($275,000 x 1/2) = $550,000.

For the second mall, the expected profit is ($550,000 x 3/4) + (-$165,000 x 1/4) = $412,500.

The overall expected profit is the sum of the expected profit for each mall, which is $550,000 + $412,500 = $962,500.