Question

A small company plans to invest in a new advertising campaign. There is a 20% chance that the company will lose $5,000, a 50% chance of a break even, and a 30% chance of a $10,000 profit. Based ONLY on this information, what should the company do? A) The expected value is $2,000.00, so the company should proceed with the campaign. B) The expected value is $4,000.00, so the company should proceed with the campaign. C) The expected value is −$2,000.00, so the company should not proceed with the campaign. D) The expected value is −$3,000.00, so the company should not proceed with the campaign.

Answer 1

A small company plans to invest in a new advertising campaign.

There is a 20% chance that the company will lose $5,000 ,

50% chance of a break even, and a 30% chance of a $10,000 profit

So the expected value from the advertisement campaign is calculated as - 20% of 5000 + 0% of 5000 + 30% of 10,000

= -1000 + 0 + 3000

= 2000

The expected value from the advertisement campaign is $2000.

So the Company must go ahead with the campaign.

Answer : Option A

Hope it helps.

Thank you ..!!