John is trying to decide whether to expand his business or not. If he continues his business as it is, with no expansion, there is a 50 percent chance he will earn $100,000 and a 50 percent chance he will earn $300,000. If he does expand, there is a 30 percent chance he will earn $100,000, a 30 percent chance he will earn $300,000 and a 40 percent chance he will earn $500,000. It will cost him $150,000 to expand. John should:
A. expand, since he expects to earn $320,000 by expanding, and it will only cost him $150,000 to do so.
B. not expand, because there is a chance John will earn the same as if he didn't expand and would be out the $150,000 investment.
C. not expand, since he expects to earn $120,000 more by expanding than not, and it will cost him $150,000 to do so.
D. expand, since he has a 70 percent chance of earning more than the cost of expansion.
C. not expand, since he expects to earn $120,000 more by expanding than not, and it will cost him $150,000 to do so.
You might also like to view...
The government might provide a subsidy when
A) a negative externality exists. B) an effluent fee has been unsuccessful. C) it wants to increase the amount of a good consumed. D) it wants to transform a negative externality into a positive externality.
Suppose you order a slice of pepperoni pizza and a soda at a shopping mall food court. What are examples of the opportunity costs of this decision?
What will be an ideal response?