Question: A store owner must decide whether to build a small or large shop at a new location. Building a small shop will cost the owner

A store owner must decide whether to build a small or large shop at a new location. Building a small shop will cost the owner P150,000 while building a large plant will cost P250,000. Demand at the new location can be either high or low, which probabilities estimated to be 0.45 and 0.55, respectively. If small shop is built and demand proves to be high, the owner may choose not to expand and earn P335,000 or to expand and earn P445,000. If a small shop is built and the demand turns out to be low, there is no reason to expand and P320,000 will be earned. If a large shop is built and the demand proves to be low, the choices are to do nothing and earn P100,000 or to stimulate demand through an ad campaign and earn P500,000. Creating the ad campaign will cost P200,000. Finally, if a large shop is built and the demand turns out to be high, P700,000 will be earned.

1. What would be the owners best decision?

A. Small Shop

B. Large Shop

2. What would be the expected value of the best decision?

A. 256,350.00

B. 226,250.00

C. 230,000.00

D. 250,000.00

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