Question

Suppose there are two possible outcomes if a new policy is instituted to improve air quality. There is a 30% chance it will produce $20 million in economic benefits, and a 70% chance it will produce $40 million in benefits. What is the expected value of the benefits of this policy?

Answer 1

Given:

Benefit from first policy = $20 million

Probability to get $20 million = 30%

Benefit from Second policy = $40 million

Probability to get $20 million = 70%

Find:

Expected value of the benefits:

Computation of expected value of the benefits:

Expected value of the benefits = Expected benefit from first policy + Expected benefit from Second policy

Expected value of the benefits = ($20 million × 30%) + ($40 million × 70%)

Expected value of the benefits = ($6 million) + ($28 million)

Expected value of the benefits = $34 million

Therefore, the expected value of the benefits from policies is $34 million.