Company expects sales next year o be $1,500,000 if the economy is stron, $800,000 if the econy is teady, and $500,000 if the economy is weak. Mr. Sharpe believes there is a 20 percent probability the economy will be strong, a 50 percent probability of a steady economy, and a 30 percent probability of a weak economy. What is the expected level of sales for the next year?

I think I did this right…

1,500,000 x .20 = 300,000
800,000 x .50 = 400,000
500,000 x .30 = 150,000

300+400+150 = 850,000

I did it like this

800,000 x .50 expected outcome + 400,000 normal condition
(500,000) x .30 expected outcome + 150,000

Expected value of return = + 250,000

The book show substration from normal minus tight?? What do you think

Quote:

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800,000 x .50 expected outcome + 400,000 normal condition
(500,000) x .30 expected outcome + 150,000

Expected value of return = + 250,000

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I don't get the math here. What happened to the 1,500,000?

Quote:

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The book show substration from normal minus tight?? What do you think

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I think CaptainForest is right. I don't understand why you'd just dump out the 1,500,000, nor do I understand why this would be a subtraction. Not to mention that it's impossible for the "expected" sales to be less than any of the three estimates! The answer must be between the low and high estimates.

It's basically a weighted average, because the percents "weight" each amount by the probability that they will happen. And when using percents, the division is already built in, so you just need to add them up. And "expected" number is the average. And the 850,000 is the weighted average here.

Regardless of the finances, this is actually probabilities, i.e. statistics. If you'd like, you can re-post this under the math homework help section. It doesn't matter that it's sales. It's still probabilities. I do stats too but am not an expert at it. So you can check with the math people if you'd like.

I think what the book is showing you is different why of comparison

I agree the correct way is
150,000 .20 = 300,000
800,000 .50
500,000 .30
total expected sales level $850,000
The shows if you would compare what is the better way to go if you took to company in compared pricing.
8,500
total 37,