Guys I am sure a lot of you have seen the below example:
Dough Distributors has decided to increase its daily muffin purchases by 100 boxes. A box of muffins costs $2 and sells for $3 through regular stores. Any boxes not sold through regular stores are sold through Dough’s thrift store for $1. Dough assigns the following probabilities to selling additional boxes:
Additional sales Probability
What is the expected value of Dough’s decision to buy 100 additional boxes of muffins?
Since Dough earns $1 profit per box ($3 sales price – $2 cost), this represents $76 (76 boxes x $1 profit) of additional
profit. However, the twenty-four unsold boxes would have to be sold at a $1 loss per box ($1 sales price· . $2 cost) through Dough’s thrift store. Therefore, the expected value of the decision to purchase the additional muffins is $52 net profit ($76 profit – $24 loss).
My question is why are we considering 76 boxes? and 24 boxes? I am confused actly rather wrong, when I think:
Step 1: EV of selling 60% of the boxes =[.6 x60 boxes x $1 ]
Step 2: EV of selling 40% of the boxes =[.4 x40 boxes x $1 ] —-this is what i initially thought, which is wrong.
Step 3: EV of selling 100% of the boxes =[.4 x100 boxes x $1 ]
Can any one please answer why step 2 is wrong. It will help me understand this question. Thank you all.
Think of it this way,
In this particular question there is a 40% chance that ALL 100 boxes will be sold at a profit = $40 of profit (.4*100)
There is also a 60% chance only 60 of the 100 will be sold at a profit. = 36$ of profit (.6*60)
There is also a 60%(NOT 40%) chance that 40 of the 100 will be sold at a loss = 24$ of loss (.6*40)
$40 + 36 – 24 = 52
Your error was that you though there was a 40% chance to sell 40 boxes rather than 60%. I think… let me know if this helps.
thanks dutkas, um taking bec on 2nd of july, and still not sure how to prepare for communication 🙁 how r u preparing?
I am just reviewing all of my multiple choice understanding the underlying meaning behind everything whether I get it right or wrong. I have always been a good writer so in terms of the format, I am not worried. I am worried that I will be given topics I can not fully develop. I have a strong understanding of BEC so hopefully I have maximized my chances at drawing a favorable subject! We shall see.
best of luck bro!
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