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. If John were to expand, which of the following is true?
A. John's expected earnings are $50,000 less than if he didn't expand.
B. John can expect to earn $120,000 more by expanding, but that is less than the cost of expansion, $150,000.
C. John can expect to earn $120,000 more by expanding and therefore made the most profitable decision.
D. All of these statements are true.
B. John can expect to earn $120,000 more by expanding, but that is less than the cost of expansion, $150,000.
You might also like to view...
When investment bankers underwrite new stock, they
A) sell them on one of the stock exchanges. B) auction them off to the public. C) sell them to commercial banks who in turn find buyers. D) place them with ultimate investors and some intermediaries throughout the country.
Assuming a required reserve ratio of 8%, interest rate on reserves of 0.5%, and interest rate on loans of 4%, what is the effective cost of the reserve requirement on a $1000 deposit?
A) 0.05% B) 0.28% C) 0.32% D) 4%