The owner of Tastee Cookies needs to decide whether to lease a small, medium, or large new retail outlet. She estimates that monthly profits will vary with demand for her cookies as follows:
If she feels there is a 30 percent chance that demand will be high, what are the expected monthly profits for the outlet she will decide to lease?
A) $1,600
B) $1,100
C) $1,000
D) $900
E) $500

Question

The owner of Tastee Cookies needs to decide whether to lease a small, medium, or large new retail outlet. She estimates that monthly profits will vary with demand for her cookies as follows: 
If she feels there is a 30 percent chance that demand will be high, what are the expected monthly profits for the outlet she will decide to lease?
A) $1,600 
B) $1,100 
C) $1,000 
D) $900 
E) $500

Quizplus · Accepted Answer

To calculate the expected monthly profits for each size of retail outlet, we multiply the monthly profits by the probability of high demand and add that to the monthly profits multiplied by the probability of low demand.

For the small outlet: 
Expected profits = (0.3 x 600) + (0.7 x 200) = $360 + $140 = $500

For the medium outlet: 
Expected profits = (0.3 x 900) + (0.7 x 400) = $270 + $280 = $550

For the large outlet: 
Expected profits = (0.3 x 1500) + (0.7 x 700) = $450 + $490 = $940

Therefore, the best choice based on expected profits is to lease the medium outlet, as it has the highest expected profits of $550 per month.

The Owner of Tastee Cookies Needs to Decide Whether to Lease