Asked by Alexandra Barrett on Jul 09, 2024
Verified
A movie producer has to decide to fund a new movie project.For this project,a success would earn $20 million and a failure would cost $60 million in lost profits. At what probability of expected success should he fund the movie?
A) 0.20
B) 0.25
C) 0.50
D) 0.75
Lost Profits
The amount of money a business fails to earn due to disruptions, such as contractual breaches, acts of negligence, or other causes.
Expected Success
The anticipated probability or degree of achievement in a given venture or for a particular outcome.
- Understand the decision-making process under uncertainty and how to balance the risks and benefits.
Verified Answer
XM
Xycladi MartinezJul 13, 2024
Final Answer :
D
Explanation :
The expected value of funding this project can be calculated as follows:
Expected Value = (Probability of Success x Potential Profit) - (Probability of Failure x Potential Loss)
Let x be the probability of success
Expected Value = (x * $20 million) - ((1-x) * $60 million)
Simplifying this expression:
Expected Value = 80x - 60
The producer should fund the movie only if the expected value is positive.
80x - 60 > 0
80x > 60
x > 0.75
Therefore, the producer should fund the movie if there's a probability of expected success greater than 0.75 or 75%.
Hence, the best choice is D) 0.75.
Expected Value = (Probability of Success x Potential Profit) - (Probability of Failure x Potential Loss)
Let x be the probability of success
Expected Value = (x * $20 million) - ((1-x) * $60 million)
Simplifying this expression:
Expected Value = 80x - 60
The producer should fund the movie only if the expected value is positive.
80x - 60 > 0
80x > 60
x > 0.75
Therefore, the producer should fund the movie if there's a probability of expected success greater than 0.75 or 75%.
Hence, the best choice is D) 0.75.
Learning Objectives
- Understand the decision-making process under uncertainty and how to balance the risks and benefits.
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