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ABC Firm faces uncertain revenues and uncertain costs. Its revenue may be $115million, 155million, Or 165 Million, with chances of 0.2, 0.30 and 0.5, respectively. Its costs are $140 or $160 million with chances of 0.55 and 0.45, respectively. Revenues and cost are independent.

(a) Calculate the firm's expected values and standard deviations for revenues and cost, respectively.
(b) Identify the possible profit outcomes? Draw a decision tree listing these profit outcomes.
(c) Compute the firm's expected profit by folding back the tree.
(d) Calculate the firm's expected profits.

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Solution Summary

This solution calculates the firm's expected values and standard deviations for revenues and cost, respectively.

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