John Is Trying to Decide Whether to Expand His Business

question 92

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 is the difference in expected earnings if John chooses to expand versus not expand?

• A)$320,000
• B)$200,000
• C)$150,000
• D)$120,000

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Definitions:

Integer

A whole number that can be positive, negative, or zero, not including fractions or decimals.

Nonlinear Optimization Model

A mathematical problem solving framework designed to optimize a nonlinear objective function subject to nonlinear constraints.

Mixed Integer Linear Optimization Model

An optimization model that seeks the best solution from a set of linear equations and inequalities, where some of the decision variables are constrained to be integer values.

Integer

A whole number that can be positive, negative, or zero but does not include fractions or decimals.