A company needs to make an important decision in the face o

. A company needs to make an important decision in the face of uncertainty. It has been estimated that the firm will either gain $10 000 with probability 0.4, gain $1000 with probability of 0.3 or lose $5000 with probability 0.3. Having taken a Business Analytics course, employee X (correctly) calculates the EMV as $2800. Her colleague Y distrusts her analysis, since after all, the firm will either receive 10 000, 1000 or lose 5000, and 2800 is not one of these options. Who is correct and why?

Solution

First let us tabulate the pdf for gain and calculate mean

Hence expected gain = 2800

Since positive worth trying

X is right, y is not right as average need not equal to any of the values.