You are trying to decide whether to open a new restaurant, so you are uncertain about...

 

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You are trying to decide whether to open a new restaurant, so you are uncertain about what your annual revenues and costs might be. You estimate that there is a 0.25, 0.60, and 0.15 probability the new restaurant will generate $500, $300, or $200 thousand in annual revenue. Alternatively, you estimate there is a 0.4 and 0.6 probability that your operating costs will be $350 or $150 thousand. This information is used to construct the probability distribution of profits below. Revenue Value ($1,000) 500 300 200 500 300 200 Prob. 0.25 0.60 0.15 0.25 0.60 0.15 Operating Cost Value ($1,000) 350 350 350 150 150 150 Prob. 0.4 0.4 0.4 0.6 0.6 0.6 Profit Value ($1,000) 500 350 150 300 350-50 200 350-150 500 150 350 150 300 150 200-150=50 Prob. 0.25 x 0.4 0.60 x 0.4 0.15 x 0.4 0.25 x 0.6 0.60 x 0.6 0.15 x 0.6 0.10 0.24 0.06 0.15 0.36 0.09 a. Use the probability distribution in this table to calculate the restaurants annual expected profit. Based on the expected value criterion, should you open this restaurant? (10 points) You are trying to decide whether to open a new restaurant, so you are uncertain about what your annual revenues and costs might be. You estimate that there is a 0.25, 0.60, and 0.15 probability the new restaurant will generate $500, $300, or $200 thousand in annual revenue. Alternatively, you estimate there is a 0.4 and 0.6 probability that your operating costs will be $350 or $150 thousand. This information is used to construct the probability distribution of profits below. Revenue Value ($1,000) 500 300 200 500 300 200 Prob. 0.25 0.60 0.15 0.25 0.60 0.15 Operating Cost Value ($1,000) 350 350 350 150 150 150 Prob. 0.4 0.4 0.4 0.6 0.6 0.6 Profit Value ($1,000) 500 350 150 300 350-50 200 350-150 500 150 350 150 300 150 200-150=50 Prob. 0.25 x 0.4 0.60 x 0.4 0.15 x 0.4 0.25 x 0.6 0.60 x 0.6 0.15 x 0.6 0.10 0.24 0.06 0.15 0.36 0.09 a. Use the probability distribution in this table to calculate the restaurants annual expected profit. Based on the expected value criterion, should you open this restaurant? (10 points)

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Expected value formula N Pi xi ... View the full answer