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Question: 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 for $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 $2:50 = ($3 + $2)/2. The manager then calculates expected revenue as the expected number sold times the expected price: E(Revenue) = 200($2:50) = $500. What is wrong with the manager's calculation?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M92332678

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