Question

A group of medical professionals is considering the construction of a private clinic. If the medical demand is high (i.e. there is a favourable market for the clinic), the doctors expect to make a nett profit of R4m. If the market is not favourable, they can expect to lose R1.6m. In the light of their present information, they estimate that there is a 50:50 chance that the market is favourable. If they decide to go ahead and build the clinic, their expected profit is?

Answer 1

Solution :-

Probability of favourable market = 50% or 0.5

Probability of unfavorable market = 50% or 0.5

Profit in case of favourable market = R4m

Profit in case of unfavorable market = - R1.6m

( In case of unfavorable market , there is a lose of R1.6m ,so, a negative sign has been added to show it is loss.

Expected profit :-

= ( Probability of favourable market * profit in case of favorable market ) + (Probability of unfavorable market * profit in case of unfavorable market)

= ( 0.5 * R4m ) + ( 0.5 * (- R1.6m))

= R2m - R0.8m

= R1.2m

So, the expected profit is R1.2m