John Is Trying to Decide Whether to Expand His Business

question 83

Multiple Choice

John is trying to decide whether to expand his business or not. If he continues his business as it is, with no expansion, there is a 50 percent chance his revenue will be $100,000 and a 50 percent chance his revenue will be $300,000. If he does expand, it will cost him $150,000, and there is a 30 percent chance his revenue will be $100,000; a 30 percent chance his revenue will be $300,000; and a 40 percent chance his revenue will be $500,000.If John decides to expand based on expected value, it means that:

• A)the difference in expected revenue from expanding versus not expanding must be greater than $150,000.
• B)the expected revenue from not expanding must be less than $150,000.
• C)the difference in expected revenue from expanding versus not expanding must be less than $150,000.
• D)the expected revenue from expanding must be greater than $150,000.

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Definitions:

Corn Crop

The cultivated plant of the genus Zea that yields the grain corn, a staple food in many parts of the world, used for human consumption, animal feed, and for industrial purposes.

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A flammable liquid derived from petroleum, used primarily as fuel in internal combustion engines.

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The cost per unit volume of wood, a key commodity in construction and manufacturing.