Question

As is below, the profits of my firm next year depend on whether the economy in West Virginia is good, fair, or poor since my business is very tied to that economy. In fact if the economy is poor I will make losses.

                                           

Economy is Good: profits = $120,000 ; Fair: profits = $40,000 ; Poor: profits = -$20,000

            Suppose there is a 60% chance the economy will be good, 25% chance for fair, and 15% chance for the economy to be poor. What are the expected profits of my firm for next year?

A. $46,666.67             B. $79,000      C. $85,000      D. $77,000      E. $89,000

Answer 1

Ans. B. $79,000

Expected profit = good x prob. of good+ fair x prob. of fair -poor x prob. of poor

= $120,000 x 60% + $40,000 x 25% - $20,000 x 15%

= $79,000

hence, the expected profits of firm next year is $79,000