Question

On April 1, Bob the Builder signed a month-long contract to build a barn for Nolan. Bob is guaranteed to receive a flat fee of $ 5,000 for his services, plus a bonus depending on when the project is completed. Nolan offered to pay an additional $ 1,500 of the flat fee if the project was completed 2 weeks early. The probability of finishing 2 weeks early is 40% What is the price of this contract for Bob under the expected value method?

Select one:
a. $ 5,900
b. $ 5,000
c. $ 6,500
d. $ 5,600

Answer 1

Sol Information given Guaranteed Flat Fee Additional Fee if the project was completed 2 weeks early Probability of finishing 2 weeks early is $ $ 5,000 1,500 40% Step 1; From the above let us caculate Fee under different probabilities Total Fee if the project was completed 2 weeks early (5000+1500) $ Total Fee if the project was not completed 2 weeks early (5000+0) $ 6,500 5,000 No addition Fee Step 2: Probability of different Scenario Particulars Finishing the project 2 weeks early Not Finishing the project 2 weeks early (100-40) Probability 40% 60% Step 3: Price of the contract using expected value method Scenario Finishing the project 2 weeks early Not Finishing the project 2 weeks early (100-40) Expected Price of contract Total Fee (A)- Step1 $ 6,500 $ 5,000 Probability (A) - Step 2 40% 60% Expect Value (A)x(B) $ 2,600 $ 3,000 $ 5,600 Therefore, price of this contract for Bob under the expected value method is $ 5,600 Option D