The proprietor of Midland Construction Company has to decide between two project

Question

The proprietor of Midland Construction Company has to decide between two projects. He estimates that the first project will yield a profit of $170,000 with a probability of 0.6 or a profit of $150,000 with a probability of 0.4; the second project will yield a profit of $230,000 with a probability of 0.6 or a profit of $70,000 with a probability of 0.4. Find the expected profit for each project.

first project $

second project $

Which project should the proprietor choose if he wants to maximize his expected profit?

first project

second project

Explanation / Answer

First project:

x                     p                            xp

170,000    0.6    102,000

150,000    0.4    60,000

Expected profit of first project = 162,000

Second project:

x                    p                                xp

230,000          0.6                        138,000

70,000           0.4                        28,000

Expected profit of second project = 166,000

Since the expected profit of second project is more, proprietor should choose second project.

Thus, the answers to the questions asked are:

(a) fist project: 162,000

(b) econd project: 166,000

(c) Correct option: second project

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