A retailer is considering building a large store. If the local economy experiences expansion, the firm expects the store to earn a $2,000,000 profit next year. If the local economy experiences a contraction, the firm expects the store to lose $400,000 next year. Analysts estimate a 30% chance for the local economy to experience an expansion next year (hence a 70% chance for contraction). What is the expected monetary value (EMV) of building the large store?
A) $880,000
B) $320,000
C) $2,000,000
D) $80,000
E) $1,520,000

Question

Quizplus · Accepted Answer

The expected monetary value (EMV) is calculated by multiplying each outcome by its probability and then summing these products. For expansion: $2,000,000 * 0.30 = $600,000. For contraction: -$400,000 * 0.70 = -$280,000. Adding these gives $600,000 - $280,000 = $320,000.

A Retailer Is Considering Building a Large Store