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: $\begin{array}{|l|l|l|l|}
\hline\text {SIZE}\
\text {OF}&\text {DEMAND}\
\hline \text { OUTLET } & \text { LOW } && \text { HIGH } \
\hline \text { Small } & \$ 1,000 && 1,000 \
\hline \text { Medium } & 500 && 2,500 \
\hline \text { Large } & 0 && 3,000 \
\hline
\end{array}$ 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

Quizplus · Accepted Answer

The expected profit for each outlet size is calculated by multiplying the profit for each demand level by the probability of that demand level and summing the results. For the small outlet: $0.7 \times 1000 + 0.3 \times 1000 = 1000$. For the medium outlet: $0.7 \times 500 + 0.3 \times 2500 = 1100$. For the large outlet: $0.7 \times 0 + 0.3 \times 3000 = 900$. The highest expected profit is for the medium outlet at $1,100.

The Owner of Tastee Cookies Needs to Decide Whether to Lease