Question 1000220

<table border=1><tr><th></th><th>A</th><th>B</th><th></th></tr><tr><td>Outcome</td><td>Probability </td><td>Net Earnings</td><td></td></tr><tr><td>Bid Accepted</td><td>0.2</td><td>22,000</td><td>See note 1</td></tr><tr><td>Bid Rejected</td><td>0.8</td><td>-4,000</td><td>See note 2</td></tr></table>


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


<table border=1><tr><th></th><th>A</th><th>B</th><th>C=A*B</th></tr><tr><td>Outcome</td><td>Probability</td><td>Net Earnings</td><td></td></tr><tr><td>Bid Accepted</td><td>0.2</td><td>22,000</td><td>4,400</td></tr><tr><td>Bid Rejected</td><td>0.8</td><td>-4,000</td><td>-3,200</td></tr></table>


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