Answer the following questions using the information below:
Patrick Ross has three booth rental options at the county fair where he plans to sell his new product. The booth rental options are:
Option 1: $1,000 fixed fee, or
Option 2: $750 fixed fee + 5% of all revenues generated at the fair, or
Option 3: 20% of all revenues generated at the fair.
The product sells for $37.50 per unit. He is able to purchase the units for $12.50 each.
-Which option should Patrick choose to maximize income assuming there is a 40% probability that 70 units will be sold and a 60% probability that 40 units will be sold?
A) Option 1
B) Option 2
C) Option 3
D) All options maximize income equally.

Question

Answer the following questions using the information below:
Patrick Ross has three booth rental options at the county fair where he plans to sell his new product. The booth rental options are:
Option 1:	$1,000 fixed fee, or
Option 2:	$750 fixed fee + 5% of all revenues generated at the fair, or
Option 3:	20% of all revenues generated at the fair.
The product sells for $37.50 per unit. He is able to purchase the units for $12.50 each.
-Which option should Patrick choose to maximize income assuming there is a 40% probability that 70 units will be sold and a 60% probability that 40 units will be sold?
A) Option 1
B) Option 2
C) Option 3
D) All options maximize income equally.

Quizplus · Accepted Answer

Expected revenues = 0.4(70 × $37.50) + 0.6(40 × $37.50) = $1,950
Expected CM before options = 0.4(70 × $25) + 0.6(40 × $25) = $1,300
Option 1: $1,300 - $1,000 = $300
Option 2: $1,300 - $750 - 0.05($1,950) = $452.50
Option 3: $1,300 - 0.2($1,950) = $910*
* = maximization of income

Answer the Following Questions Using the Information Below