Answer Happy

T13 4. A company operating a chain of pharmacies can open a new store in one of two loca- tions. Company management figures that the first location will show an annual profit, of $10,000 if it is successful and a loss of $1,000 (i.e. an outcome of -1000) if it is not. A store built at the second location will show an annual profit, 12 of $15,000 if it is successful and an annual loss of $5,000 if it is not. Suppose that the probability of success is one-half for each location.

(a) Where should the company locate its store as to maximize expected profit, E(T)? Show why. (b) Suppose the company is averse to taking risk; it doesn't like locations where profits have a high variance. Where should the company locate its store if its objective is to minimize the variance of profit? Show why.