1.8 Expected Value and Decision Making 101 There is a 0.25 probability that the
ID: 3051885 • Letter: 1
Question
1.8 Expected Value and Decision Making 101 There is a 0.25 probability that the temperature will drop below freezing, and Best rn Company has to decide on whether or not to fire up its smudge pots to protect its investment. It will cost the company $2000 to employ the smudge pots. If there is Farming) Orange $9500y has $9500 crop rop would realize a revenue of $23,000 at market, as opposed to a revenue of if there is no freeze (a matter of supply and demand). The crop will not survive a reeze the c a f $17,000 freeze without the smudge pots. Should the pots be used?Explanation / Answer
Solution:
Scenario 1 is fire up the pots. If we fire up the pots,
Our expected revenue is .2(23,000)+ .8(17,000) =
4,600+13,600 = 18,200.
But there is the cost of firing up the pots along w the. Original investment cost so the profit would be 18,200-(2000+9,500) =6,700
scenario 2
The profit if we don't fire up the pots is
we only get a profit if it doesn't freeze. So the expected revenue is
.2(0)+.8(17,000)=13,600
the cost is just the cost of investment 9,500
so expected profit = 13,600-9,500=4,100
since the expected profit of firing up the pots is greater than not, they should fire up the pots
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