Samuel Knight is considering opening a print shop on Johnson Street, two blocks

Question

Samuel Knight is considering opening a print shop on Johnson Street, two blocks away from a local college. He has found a good location that attracts possible business. His options are to open a small shop, a medium shop, or no shop at all. The market for a print shop can be positive, average, negative compared to the area business climate. The probabilities for these three are 0.20 for a positive market, 0.50 for an average market, and 0.30 for a negative market. The net profit or loss figures for the medium, small, and no shops for the various market conditions are given in the table. Building no shop at all yields no loss and no gain.

(Question A: 3 points) Report the expected value outcomes. Based upon the expected value outcomes, what decision would you recommend for Samuel?

Alternative    Positive Market    Average Market Negative Market Small Shop 75,000 25,000 -40,000 Medium Shop 100,000 35,000 -60,000 No shop 0 0 0

Explanation / Answer

Expeced profit /(loss) = [positive market * probability of positive market] +[average market * probability of average market ]+[negative market * probability of negative market]

[75000*.20]+[25000*.50]+[-40000*.30]

15000+ 12500- 12000

15500

[100000*.20]+[35000*.50]+[-60000*.30]

20000+17500-18000

19500

It is recommended for samuel to open medium shop as total profit is highest under this alternative.(19500

profit /(loss) small shop

[75000*.20]+[25000*.50]+[-40000*.30]

15000+ 12500- 12000

15500

medium shop

[100000*.20]+[35000*.50]+[-60000*.30]

20000+17500-18000

19500

No shop 0

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