Answer to Question #275772 in Economics of Enterprise for Fernando

Question

Annual savings due to an energy efficiency project have a most likely value of $30,000. The high

estimate of $40,000 has a probability of 0.2, and the low estimate of $20,000 has a probability of 0.30.

What is the expected value for the annual savings?

Answer 1

The high estimate of $\$40,000$ has a probability of 0.2, and the low estimate of $\$20,000$ has a probability of 0.35.

Thus, the estimate of $\$30,000$ has a probability of;

$(1-0.2-0.3)=0.5$ .

The expected value for the annual savings is the weighted average of the annual savings.

Hence, the expected value for the annual savings ;

$=0.5×30000+0.2×40000+0.3×20000 = \$29000$

$\therefore$ the expected value for the annual savings is $\$29000$ .