Question

Salman is planning o set up a booth at the weekend market.From past experience , he has learned that sales at the market fluctuate with both the weather and the advertising he purchases in the local newspaper.For the coming weekend, if he purchases advertising , he can expect to make a profit of $8,000 on goods sold(9000 less 1,000 in advertising), if the weather is good, however , if the weather is bad he will only make a profit of $3,000 .if he doesn't purchase advertising , he can expect to sell 40% less.For the coming weekend , there is a 75% chance of good weather.

Calculate the expected profit for the coming weekend if Salman does not advertise.

Answer 1

• All working forms part of the answer
• Profits when Weather is GOOD and advertising purchased = $ 8,000

With advertising cost $ 1000 and sales $ 9000.

• Profits when Weather is GOOD and advertising NOT purchased, the sales will be down by 40%

Sales = $ 9000 – 40% = $ 5,400

Advertising cost = $ 0

Profits = $ 5,400 (Advertising + Good Weather)

• Profits when Weather is BAD and advertising purchased = $ 3,000

With Sales being $ 3,000 and No advertising cost.

• Profits when Weather is bad and advertising not purchased, the sales will be down by 40%

Sales = $ 3000 – 40% = $ 2,400

Advertising cost = $ 0

Profits = $ 2,400 (No advertising + Bad Weather)

• Summary [in case of NO ADVERTSISING]

	Without advertising
	Weather is Good	Weather is Bad
Sales	$                    5,400.00	$           2,400.00
Advertisement cost	$                                 -	$                        -
Profits	$                    5,400.00	$           2,400.00

• Answer, along with working:

	Probability	Profit under NO advertising (calculated above]	Expected Profits
Weather is Good	75%	$                                         5,400.00	$                    4,050.00
Weather is Bad	25%	$                                         2,400.00	$                        600.00
Total Expected Profits			$                    4,650.00

Answer = $ 4,650