Question

A construction company is planning to bid on a building contract. The bid costs the company ​$1100. The probability that the bid is accepted is 1/10

. If the bid is​ accepted, the company will make ​$96,000 minus the cost of the bid.
What is the expected value in this​ situation?
Choose the statement below that best describes what this value means.
A.
In the long​ run, the construction company would expect to earn this amount on average per bid.
B.
In the long​ run, the construction company would expect to break even on average.
C.
In the long​ run, the construction company would expect to lose this amount on average per bid.
D.
None of the above

Answer 1

The expected value in this situation can be calculated as follows:

E(X) = P(X) * V(X), where X is the random variable representing the profit of the construction company, P(X) is the probability of X, and V(X) is the value of X.

In this case, the profit of the construction company if the bid is accepted is $96,000 - $1,100 = $94,900, and the probability of the bid being accepted is 1/10. Therefore, we have:

E(X) = (1/10) * $94,900 = $9,490

The expected value of $9,490 means that in the long run, the construction company would expect to earn this amount on average per bid. Therefore, the correct answer is option A: "In the long run, the construction company would expect to earn this amount on average per bid."