Lisa is trying to decide on the location of her entrepreneurial venture - Flower Power, a specialty wedding flower service. She has three possible locations (A, B,C) in mind. Lisa has projected that in the first year of operation, under ideal conditions, her company would generate $80,000 at Location A, $55,000 at Location B, and $45,000 at Location C. However, after further analysis, Lisa has determined that there is only a 20 percent chance of ideal conditions occurring during the first year of operation in Location A. Locations B and C have a .4 and a .8 probability, respectively, for ideal conditions during the first year of operations. Based on this information, the expected value for Location A is ________, while for Location B it is ________.
A) $400,000; $137,500
B) $16,000; $22,000
C) $64,000; $33,000
D) $96,000; $77,000
E) $320,000; $82,500

Question

Quizplus · Accepted Answer

To find the expected value for each location, we multiply the probability of ideal conditions by the projected revenue for that location and add up the results:

Expected value for Location A = 0.20 x $80,000 = $16,000
Expected value for Location B = 0.40 x $55,000 = $22,000
Expected value for Location C = 0.80 x $45,000 = $36,000

Therefore, based on expected value, the best choice would be Location B. Although Location A has the highest projected revenue, the probability of ideal conditions is too low to make it the best choice. Location C has a higher probability of ideal conditions than Location B, but its lower projected revenue makes it a less attractive choice.

Lisa Is Trying to Decide on the Location of Her