EXPECTED VALUE AND UNCERTANTY

Problem 1: Expected Value

Determine whether you would decide, based on profitability, to go with the product cluster of Product A, Product B, and Product C or the product cluster of Product X, Product Y, and Product Z.

Cluster ABC

Product A is expecting revenues of $800,000 and costs of $420,000.

Product B is expecting revenues of $600,000 and costs of $180,000.

Product C is expecting revenues of $750,000 and costs of $375,000.

The probability of achieving these revenues and costs are 28% for Product A and 36% for Product C?

Cluster XYZ

Product X is expecting revenues of $800,000 and costs of $270,000.

Product Y is expecting revenues of $630,000 and costs of $260,000.

Product Z is expecting revenues of $760,000 and costs of $400,000.

The probability of achieving these revenues and costs are 29% for Product X and 37% for Product Z?

Your goal is to maximize profits. Which product cluster would you choose?

For any credit, you must show all your work.

ANSWER: