Answer: $350,000
Explanation:
Commit to the amount with the highest expected value:
Expected value at $300,000:
= (0.4 * 300,000) + (0.6 * 250,000)
= $270,000
Expected value at $350,000:
= (0.25 * 350,000) + (0.75 * 250,000)
= $275,000
Expected value at $400,000
= (0.1 * 400,000) + (0.9 * 250,000)
= $265,000
Expected value if no sales:
= (0.25 * 0) + (0.75 * 250,000)
= $187,500
<em>Price that maximises profits is $350,000 as it has the highest expected value. </em>
