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You are a t-shirt designer and have a new design you are excited about. Another company offers to buy your design for $6,000. Or you could produce and sell your own t-shirts with this new design. You estimate you have a 25% chance your t-shirt is a huge success, a 20% chance of your t-shirt is marginally liked and earns gross revenues of $4,000, and a 55% chance your t-shirt is a failure and earns gross revenue of $500. If your t-shirt is a huge success, there is a 50% chance it will earn gross revenues of $25,000, a 15% chance it will earn gross revenues of $30,000, and a 35% chance it will earn gross revenues of $40,000. The cost to produce the t-shirts yourself is $3,000. Assume you make decisions using expected value, and you make the optimal decision. What is your expected earnings (in $) from your new t-shirt design

Respuesta :

anthougo

Answer:

The expected earnings from the new t-shirt design is:

= $5,825.

Explanation:

a) Data and Calculations:

State                     Percent    Revenue   Expected value

Huge success         25%      $31,000          $7,750

Marginal success    20%      $4,000               800

Failure                     55%      $500                  275

Total expected revenue                            $8,825

Huge success

Percent     Revenue   Expected value

50%          $25,000         $12,500

15%             30,000             4,500

35%            40,000            14,000

Total expected revenue $31,000

Alternative 1: Sell design:

Earnings = $6,000

Alternative 2: Produce the t-shirts:

Earnings:

Total expected revenue = $8,825

Total cost to produce =       3,000

Net earnings                     $5,825

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