Aline and Sarah decide to go into business together as economic consultants. Aline believes they have a 50-50 chance of earning $200,000 a year, and that if they don't, they'll earn $0. Sarah believes they have a 75% chance of earning $100,000 and a 25% chance of earning $10,000. The expected value of the undertaking, according to Sarah, is $75,000. according to Sarah, is $100,000. according to Aline, is $200,000. according to Aline, is $100,000.

Question

Erik White

Business

25 October, 16:10

Aline and Sarah decide to go into business together as economic consultants. Aline believes they have a 50-50 chance of earning $200,000 a year, and that if they don't, they'll earn $0. Sarah believes they have a 75% chance of earning $100,000 and a 25% chance of earning $10,000. The expected value of the undertaking, according to Sarah, is $75,000. according to Sarah, is $100,000. according to Aline, is $200,000. according to Aline, is $100,000.

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Answers (1)

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Rene Rich · Answer 1

Option (D) is correct.

Explanation:

For Aline:

E (v) = Earning * Probability of earning + Don't believe earning * probability

= 200,000 (0.5) + 0 (0.5)

= 100,000

For Saraf:

E (v) = Earning * Probability of earning + Earning * probability

= 0.75 (100,000) + 0.25 (10,000)

= 77,500

Therefore, the expected value of the undertaking is according to Aline, is $100,000.