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4. I want to open a bakery and I am considering locations at two different shopping centers. Use expected value to determine which location I should use.
Location 1: Location 2:
According to my consultant, if the bakery is successful, I can anticipate an annual profit of $300,000. If it’s not successful, I can anticipate an annual loss of $100,000. The probability of success of this location is 0.5.
According to my consultant, if the bakery is successful, I can anticipate an annual profit of $200,000. It it’s not successful, I can anticipate an annual loss of $60,000. The probability of success at this location is 0.75.

Respuesta :

For location 1:
Probability of success = 0.5
Probability of failure  = 1 - Probability of success = 0.5

Expected Value for Location 1 will be:
[tex]E(1)=0.5(300000)-0.5(100000)=$100000[/tex]

For location 2:
Probability of success = 0.75
Probability of failure = 1 - 0.75 = 0.25
So, expected value for Location 2 will be:
[tex]E(2)=0.75(200000)-0.25(60000)=$135000[/tex]

The expected value from Location 2 is larger than Location 1, so Location 2 must be used to open up a bakery.

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