Maximizing Expected Profit: A Contractor's Dilemma and How to Calculate It

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In summary, "Maximizing Expected Profit" is the process of determining the most profitable decision for a contractor by considering all potential outcomes and their associated probabilities. This calculation involves identifying costs, revenues, probabilities of success, and potential risks. It can be applied to any type of contract, but has limitations as it assumes all outcomes and probabilities are known and does not consider non-monetary factors.
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YODA0311
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Expected profit, help please

1. A contractor is considering a sale that promises a profit of 38,000 with a probability of 0.7 or a loss (due to bad weather, strikes, and such) of 16,00 with a probability of .3. What is the expected profit?

2. I used the expected value formula, E= E[x*P(x)]

3. Then I computed it: Lose= -16000 * 0.3 -4800
Gain = 38,000 * 0.7 26600
Total= 21800
Therefore his expected profit is 21800. does this answer make sense? thank you
 
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  • #2


Yes, it makes perfect sense.
 
  • #3


Not only does it make sense, it is the correct answer!
 

Related to Maximizing Expected Profit: A Contractor's Dilemma and How to Calculate It

1. What is "Maximizing Expected Profit" and why is it important for contractors?

"Maximizing Expected Profit" refers to the process of determining the most profitable decision for a contractor in a given situation. It is important for contractors because it allows them to make informed decisions that will result in the highest potential profit for their business.

2. How do you calculate "Maximizing Expected Profit"?

The calculation for "Maximizing Expected Profit" involves identifying all potential outcomes and their associated probabilities, and then multiplying each outcome by its probability. The resulting values are then summed to determine the expected profit for each decision. The decision with the highest expected profit is the one that should be chosen.

3. What factors should be considered when calculating "Maximizing Expected Profit"?

When calculating "Maximizing Expected Profit," factors such as costs, revenues, probabilities of success, and potential risks should be taken into account. It is important to consider both short-term and long-term impacts on profit, as well as any potential external factors that may influence the outcome.

4. Can "Maximizing Expected Profit" be applied to any type of contract?

Yes, the concept of "Maximizing Expected Profit" can be applied to any type of contract as long as there are multiple possible outcomes and associated probabilities. This can be seen in construction contracts, service contracts, and even in negotiations for partnerships or business deals.

5. Are there any limitations to using "Maximizing Expected Profit" for decision-making?

While "Maximizing Expected Profit" is a useful tool for decision-making, it does have some limitations. For example, it assumes that all outcomes and probabilities are known and can be accurately predicted, which may not always be the case. Additionally, it does not take into account non-monetary factors such as company values or ethical considerations.

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