Question

An investment counselor calls with a hot stock tip. he believes that if the economy remains​ strong, the investment will result in a profit of ​$50 comma 00050,000. if the economy grows at a moderate​ pace, the investment will result in a profit of ​$10 comma 00010,000. ​however, if the economy goes into​ recession, the investment will result in a loss of ​$50 comma 00050,000. you contact an economist who believes there is a 3030​% probability the economy will remain​ strong, a 6060​% probability the economy will grow at a moderate​ pace, and a 1010​% probability the economy will slip into recession. what is the expected profit from this​ investment?

Answer 1

Expected profit is the probability of receiving a profit multiplied by the profit

So

Strong 50,000 * .30 = 15,000

Moderate = 10,000 * .60 = 6,000

Recession = -50,000 * .10= -5,000

Add those up, and you should expect a profit of around 16,000

Answer 2

Profit when economy is strong = $ 50,000

Profit when economy is at moderate pace = $ 10,000

Loss when economy is at reccession = $ 50,000

P (economy remain strong) = 30/100 = 0.3

P (economy at moderate pace) = 0.6

P (economy at reccession) = 0.1

Expected profit = Total x P (2)

= (0.3 × 50,000) + (0.6 × 10,000) - (0.1 × 50,000)

= 15,000.0 + 6,000.0 - 5,000.0

= $ 16,000

••• Expected profit = $ 16,000

Further Explanation

New profits arise in economic activities using the financial system. Profit is not obtained by chance, but thanks to the special efforts of people who use money.

Because of the relationship with money transactions, profitability specifically takes place in the context of capitalism.

Declining this view, capitalists include 3 main elements: private property institutions, the practice of profit-seeking, and competition in a free-market economic system.

Relative Advantage

• Profit is a benchmark to assess the health of a company or the efficiency of a company,
• Profit is a sign that the product or service is valued by the public,
• Profits are a whip to increase effort,
• Profit is a condition of the company's survival,
• Benefits offset the risks in the business.

Learn More

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Details

Class: College

Subject: Business

Keyword: probability, Opportunity, theory