A company wants to add a new product to its existing line of products.There are two similar candidate products A and B The demand for the new product could be high,medium,or low with probabilities of .25,.5,and .25 respectively.The demand and the corresponding profit for each product is: $$\begin{array} { | l | l | l | l | }
\hline & \text { High } & \text { Medium } & \text { Low } \
\hline \text { Product A } & 40,000 & 30,000 & 20,000 \
\hline \text { Product B } & 70,000 & 20,000 & 0 \
\hline
\end{array}$$ Based on the expected value criterion,which product should be chosen?
A)Product A
B)Product B
C)Either product since they have the same expected demand.
D)Expected demand cannot be used as a basis of decision.

Question

A company wants to add a new product to its existing line of products.There are two similar candidate products A and B The demand for the new product could be high,medium,or low with probabilities of .25,.5,and .25 respectively.The demand and the corresponding profit for each product is: $$\begin{array} { | l | l | l | l | } 
\hline & \text { High } & \text { Medium } & \text { Low } \
\hline \text { Product A } & 40,000 & 30,000 & 20,000 \
\hline \text { Product B } & 70,000 & 20,000 & 0 \
\hline
\end{array}$$ Based on the expected value criterion,which product should be chosen?
A)Product A
B)Product B
C)Either product since they have the same expected demand.
D)Expected demand cannot be used as a basis of decision.

Quizplus · Accepted Answer

The expected profit for Product A is calculated as (0.25 * 40,000) + (0.5 * 30,000) + (0.25 * 20,000) = 30,000. For Product B, it is (0.25 * 70,000) + (0.5 * 20,000) + (0.25 * 0) = 27,500. Therefore, Product A has a higher expected profit and should be chosen.

A Company Wants to Add a New Product to Its