You are the CEO of a firm currently earning $10M/year in economic profits. Your

Question

You are the CEO of a firm currently earning $10M/year in economic profits. Your head of marketing comes to you with what she calls a brilliant marketing campaign. The campaign costs $6M, and is a go-big-or-go-home campaign: there's a 70% chance it will increase revenue by $9M, and a 30% chance it will increase revenue by only $4M. Do you approve the campaign? You are the CEO of a firm currently earning $10M/year in economic profits. Your head of marketing comes to you with what she calls a brilliant marketing campaign. The campaign costs $6M, and is a go-big-or-go-home campaign: there's a 70% chance it will increase revenue by $9M, and a 30% chance it will increase revenue by only $4M. Do you approve the campaign?

Explanation / Answer

The expected gain is

= Revenue X Probability + Revenue X Probability

= 9X0.7 + 4 X 0.3

=7.5

Yes, I approve because its higher than cost $6M

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