CMA Foundation · Fundamentals of Business Economics and Management · Decision-making - Types and Process
Mehta Traders estimates that a new product will earn Rs 80,000 with probability 0.6 and lose Rs 20,000 with probability 0.4. Under the risk condition, what is the expected monetary value of launching the product?
The expected monetary value is Rs 40,000. It is computed as 0.6 times 80,000, which is 48,000, plus 0.4 times minus 20,000, which is minus 8,000. Since the probabilities are known, this is a decision under risk and the loss branch must be subtracted.
- ARs 40,000Correct
- BRs 56,000
- CRs 60,000
- DRs 48,000
Explanation
EMV = 0.6 x 80,000 + 0.4 x (-20,000) = 48,000 - 8,000 = Rs 40,000. Rs 48,000 results from ignoring the loss branch. Rs 56,000 results from adding the loss instead of subtracting it.
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