Johns garage is considering hiring another mechanic With an

John’s garage is considering hiring another mechanic. With an additional mechanic, if there are a lot of accidents in San Jose this year, then John anticipates making an additional $75,000 profit. However, if there are not a lot of accidents, then John’s garage could lose $20,000 due to the salary/benefits for the additional mechanic. John thinks that there will be a 30% chance of “ a lot of accidents” and a 70% chance of “not a lot of accidents”. Assume if John’s garage doesn’t expand, then he will have the same profit as last year.

a. What is the expected change in profit (could be a gain or a loss) if John’s garage decides to hire another mechanic.

Solution

a. if Jhon decides to hire another mechanic then the costs and revenues associated with this action:

cost will be $20,000, profits will be $70,000 with the probabilities of 0.3 and 0.7.

it can be calculated as= 0.3*70000- 0.7*20,000

= $21,000- $14,000= $7000

while considering the possible outcomes it is came to know that the profit will be $7000 per year.