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Which alternative is best, based on expected value?

Which alternative is best, based on expected value?

MATLAB: An Introduction with Applications
MATLAB: An Introduction with Applications
6th Edition
ISBN:9781119256830
Author:Amos Gilat
Publisher:Amos Gilat
Chapter1: Starting With Matlab
Section: Chapter Questions
Problem 1P
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A regional fast-food restaurant is considering an expansion program. The major factor influencing the success of such a program is the future level of interest rates. It is estimated that there is a 20% chance that interest rates will increase by 2 percentage points, a 50% chance that they will remain the same, and a 30% chance that they will decrease by 2 percentage points. The alternatives they are considering and possible payoffs are shown in the following table. Build 50 restaurants Build 25 restaurants Do nothing Rates up 2% - $220,000 -$125,000 - $60,000 Which alternative is best, based on expected value? O They should build 50 restaurants. O They should build 25 restaurants O They should do nothing. Rates unchanged Rates down 2% $55,000 $25,000 $0 $151,000 $83,000 $5,000
Transcribed Image Text:A regional fast-food restaurant is considering an expansion program. The major factor influencing the success of such a program is the future level of interest rates. It is estimated that there is a 20% chance that interest rates will increase by 2 percentage points, a 50% chance that they will remain the same, and a 30% chance that they will decrease by 2 percentage points. The alternatives they are considering and possible payoffs are shown in the following table. Build 50 restaurants Build 25 restaurants Do nothing Rates up 2% - $220,000 -$125,000 - $60,000 Which alternative is best, based on expected value? O They should build 50 restaurants. O They should build 25 restaurants O They should do nothing. Rates unchanged Rates down 2% $55,000 $25,000 $0 $151,000 $83,000 $5,000
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