Question

Aline and Sarah decide to go into business together as economic consultants. Aline believes they have a 50-50 chance of earning $200,000 a year, and that if they don't, they'll earn $0. Sarah believes they have a 75% chance of earning $100,000 and a 25% chance of earning $10,000. The expected value of the undertaking, according to Sarah, is $75,000. according to Sarah, is $100,000. according to Aline, is $200,000. according to Aline, is $100,000.

Answer 1

Answer:

Option (D) is correct.

Explanation:

For Aline:

E(v) = Earning × Probability of earning + Don't believe earning × probability

= 200,000(0.5) + 0(0.5)

= 100,000

For Saraf :

E(v) = Earning × Probability of earning + Earning × probability

= 0.75(100,000)+0.25(10,000)

= 77,500

Therefore, the expected value of the undertaking is according to Aline, is $100,000.