Question 1000220: 1. A construction company wants to submit a bid for remodeling a school. The research and planning needed to make the bid cost $4000. If the bid were accepted, the company would make $26,000. Would you advise the company to spend the $4000 if the bid has only 20% probability of being accepted? Explain your reasoning.
Answer by jim_thompson5910(35256)   (Show Source):
You can put this solution on YOUR website!
| A | B | |
|---|
| Outcome | Probability | Net Earnings | | | Bid Accepted | 0.2 | 22,000 | See note 1 | | Bid Rejected | 0.8 | -4,000 | See note 2 |
Note 1: if they win the bid, then their net earnings is $26,000-$4,000 = $22,000.
Note 2: if they lose the bid, then they spent $4,000 for nothing. This is a total loss. We write that as -4,000 (since 0-4000=-4000)
Multiply the columns A and B. Make this as column C
| A | B | C=A*B |
|---|
| Outcome | Probability | Net Earnings | | | Bid Accepted | 0.2 | 22,000 | 4,400 | | Bid Rejected | 0.8 | -4,000 | -3,200 |
Now add up the values in column C
4400+(-3200) = 1,200
So the expected value for the builder is $1,200. This is a positive value. So this means that the builder will make money and not lose money on average.
So the builder should submit the bid
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