Question

Residents of Mill River have fond memories of ice skating at a local park. An artist has captured the experience in a drawing and is hoping to reproduce it and sell framed copies to current and former residents. He thinks that if the market is good he can sell 400 copies of the elegant version at $150 each. If the market is not good, he will sell only 350 at $110 each. He can make a deluxe version of the same drawing instead. He feels that if the market is good he can sell 500 copies of the deluxe version at $110 each. If the market is not good, he will sell only 450 copies at $70 each. In either case, production costs will be approximately $30,000. He can also choose to do nothing, if he believes there is a 40% probability of a good market, what should he do and why?
Make the deluxe version? Make the elegant version? Do nothing?

Answer 1

Answer:

the artist should make the elegant version since the expected profits are higher

Explanation:

elegant version:

expected revenue = (400 x $150 x 40%) + (350 x $110 x 60%) = $47,100

expected profits = $47,100 - $30,000 = $17,100

deluxe version:

expected revenue = (500 x $110 x 40%) + (450 x $70 x 60%) = $47,100

expected profits = $42,250 - $30,000 = $12,250