In bidding for a remodeling project, a carpenter determines that he will have a net profit of 7000 dollars if he gets the contract and a net loss of 37 dollars if his bid fails. If the probability of his getting the contract is 0.1, calculate his expected return.
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Let profit (in $) is denoted with X, then
Probability distribution of X is
X ---- Probability (p)
- 37 ------- 0.9
7000 ------ 0.1
TOTAL --- 1.0
Expected profit = E(X) = sigma x*p
= ( - 37*0.9) + (7000*0.1)
= - 33.3 + 700
= $666.7
NOTE: The probability of net loss = 1 - 0.1 = 0.9
because the sum of probabilities of getting the profit and loss = 1
Probability distribution of X is
X ---- Probability (p)
- 37 ------- 0.9
7000 ------ 0.1
TOTAL --- 1.0
Expected profit = E(X) = sigma x*p
= ( - 37*0.9) + (7000*0.1)
= - 33.3 + 700
= $666.7
NOTE: The probability of net loss = 1 - 0.1 = 0.9
because the sum of probabilities of getting the profit and loss = 1
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7000 * .1 - 37 * .9 = $666.70