John Is Trying to Decide Whether to Expand His Business

question 45

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 he will earn $100,000 and a 50 percent chance he will earn $300,000.If he does expand,there is a 30 percent chance he will earn $100,000,a 30 percent chance he will earn $300,000 and a 40 percent chance he will earn $500,000.It will cost him $150,000 to expand.If John decides to expand based on expected value,it means that:

• A) the difference in expected earnings from expanding versus not must exceed $150,000.
• B) the sum of expected earnings from expanding and from not must exceed $150,000.
• C) the difference in expected earnings from expanding versus not must not exceed $150,000.
• D) his expected earnings from expansion must exceed $150,000.

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