Eric has a job at an electronics store in a mall. Eric doesn't like to work hard, and it costs him $100 to do so. Eric's employer cannot observe whether Eric works hard. If Eric works hard, there is a 75% probability that electronics goods profits will equal $400 a day and a 25% probability that electronics goods profits will equal $100 a day. Suppose Eric is paid $200 if electronics goods profits are $400 a day and $50 if electronics goods profits are $100 a day. What is Eric's expected pay for working hard?
A) $250
B) $100
C) $225.75
D) $162.50

Question

Quizplus · Accepted Answer

Eric's expected pay for working hard is calculated by multiplying the probability of each outcome by the pay associated with that outcome and then summing these products. With a 75% chance of making $200 and a 25% chance of making $50, the expected pay is (0.75 * $200) + (0.25 * $50) = $150 + $12.50 = $162.50.

Eric Has a Job at an Electronics Store in a Mall