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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 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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