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    Probability Basics: Expected Revenue

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    A firm is negotiating with a local club to supply materials for a party. The firm´s manager expects to sell 100 large bags of pretzels fot $3 each or 300 for $2 each; these two outcomes are judged to be equally likely. The expected number of bags sold is 200 = (100+300)/2, and expected price is $2,5 = ($3+$2)/2. The manger then calculates expected revenue as the expected number sold times the expected price: E(Revenue) = 200($2,5)=$500. What is wrong with the manager calculation?

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    100 bags for $3 each

    300 Bags for $2 each

    Equally likely outcomes

    Expected revenue=0.5(100*3)+0.5(300*2)=150+300=$450.

    The expected ...

    Solution Summary

    The solution provides a step-by-step explanation of how to calculate expected revenue and what is wrong with the calculation given by the manager.