You%u2019re the manager of global opportunities for a U.S. manufacturer, who is

Question

You%u2019re the manager of global opportunities for a U.S. manufacturer, who is considering expanding sales into Europe. Your market research has identified three potential market opportunities: England, France, and Germany. If you enter the English market, you have a 0.5 chance of big success (selling 100,000 units at a per-unit profit of $8), a 0.3 chance of moderate success (selling 60,000 units at a per-unit profit of $6), and a 0.2 chance of failure (selling nothing). If you enter the French market, you have a 0.4 chance of big success (selling 120,000 units at a per-unit profit of $9), a 0.4 chance of moderate success (selling 50,000 units at a per-unit profit of $6), and a 0.2 chance of failure (selling nothing). If you enter the German market, you have a 0.2 chance of huge success (selling 150,000 units at a per-unit profit of $10), a 0.5 chance of moderate success (selling 70,000 units at a per-unit profit of $6), and a 0.3 chance of failure (selling nothing). If you can enter only one market, and the cost of entering the market (regardless of which market you select) is $250,000, should you enter one of the European markets? If so, which one? If you enter, what is your expected profit?

Explanation / Answer

E(x) of english = 0.5 * (100000 * 8) + 0.3 * (60000 * 6) = 508000

E(X) of french = 0.4 * (120000 * 9) + 0.4 * (50000 * 6) = 552000

E(X) of german = 0.2 * (150000 * 10) + 0.5 * ( 70000 * 6) = 510000

we should enter on e fo the markets as E(X) of all the markets is greater than cost

since the E(X) of french is more than others we should enter french market

expected profit = 552000 - 250000 = 302000

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