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

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SUMMARY

The discussion centers on calculating the expected profit for a contractor facing uncertain outcomes. The contractor anticipates a profit of $38,000 with a 70% probability and a loss of $16,000 with a 30% probability. Using the expected value formula E = E[x*P(x)], the expected profit is calculated to be $21,800. This calculation is confirmed as accurate by participants in the discussion.

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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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Yes, it makes perfect sense.
 


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

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