Question

A farmer's income depends on weather conditions. The weather is excellent, normal, or bad with respective probabilities of 0.2, 0.6, and 0.2. Suppose she earns a revenue of $120 when the weather is excellent, $60 when the weather is normal, and -$40 when the weather is bad. She incurs a cost of $20 irrespective of weather conditions. Her expected profit is:

a. 32
b. 68
c. 48
d. 52

Answer 1

a. 32

Step-by-step explanation:

Expected Earnings = $120 × 0.2 + $60 × 0.6 + -$40 × 0.2

= $24 + $36 - $8

= $52

Expected profit = Expected Earnings - Expected Costs

= $52 - $20

= $32