Question

You are an entrepreneur, and considering whether to open a small or a large shop. Both size of shops may receive either a high or a low demand. From a research you have made, you know that 74% of the shops receive high demand; and 64% of these shops are small. Also, you have found in your research that 88% of the shops which receive low demand are also small. You expect that a large shops a profit of 1486 thousand liras per year if it receives a high demand, and 68 thousand liras of profit if the demand is low. If the shop is small, the profit in high and low demand situations are 743 and 102 liras respectively. Yearly costs of large and small shops are 250,000 TL and 40,000 TL. What is the expected profit of opening a large shop? (rounding applied)

Answer 1

so let us assume that there are 100 shops in the area.

Out of 100 shops 74 shops are having highe demannd and 26 are having low demand.

out of 74 shops, 36% of the shops are large one so large shops having high demand is 26.64 (74*0.36)

And out of 26 shops having low demands, 12% are the large one so large shop having low demands is 3.12 (26*0.12)

So out of 29.76 large shop, we have 26.64 shops will have the high demand and 3.12 having low demand.

So if we calculalte the expected value to be gained = (26.64/29.76)*1486000 + (3.12/29.76)*68000

= 1330209.67 +7129.032258

=1337338.7 Lira

So total 1337338.7 Lira would be the expected profit if we open the large shop

Now to open the large shop, we will need to invest 250000 so profit per year would be:

1337338.7 - 250000 = 1087338.71 Lira

So total expected profit would be 1087338.71 Lira if we open the large shop