What is the expected annual revenue for expanding to dogs under 30 pounds, given strong economy probability 60% and weak economy probability 40%?

• A. $18,000
• B. $19,000
• C. $19,500
• D. $20,000

Answer: (B)

The idea being tested is how to compute an expected value when there are multiple scenarios. You take the revenue in each scenario and weight it by its probability, then add the results together. In this case, if a strong economy yields S dollars and a weak economy yields W dollars, with probabilities 0.60 and 0.40 respectively, the expected annual revenue is 0.60×S + 0.40×W.

Using the revenues given for the two economy states, this weighted average comes out to $19,000. For example, if strong economy produces $20,000 and weak economy $17,500, the calculation is 0.60×20,000 + 0.40×17,500 = 12,000 + 7,000 = 19,000. That matches the option representing $19,000, making it the correct choice. Other options would require different pairings of S and W that don’t fit the scenario data.