John Is Trying to Decide Whether to Expand His Business

question 13

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.What should John do?

• A)Expand, because he expects to earn $320,000 in revenue by expanding and it will only cost him $150,000 to do so.
• B)Not expand, because there is a chance he can earn the same amount not expanding without making the $150,000 investment.
• C)Not expand, because he expects to earn only $120,000 more revenue by expanding than not, and it will cost him $150,000 to expand.
• D)Expand, because he has a 70 percent chance of earning more revenue by expanding than what it will cost to do so.

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Definitions:

Effectiveness

The degree to which something achieves its intended purpose or the success in producing a desired outcome.

Disadvantages

The negative aspects or conditions that reduce effectiveness, efficiency, or desirability.

Unilateral ECT

Electroconvulsive therapy applied to one hemisphere of the brain, typically used in treating severe depression.

Side Effects

Unintended reactions or consequences of a medication or therapy that can vary in severity from mild to life-threatening.