AQR Quick Question 13.3: Lucrative Lumber
- Author:
- Steve Phelps
- Topic:
- Arithmetic Mean, Probability
Woody Pine, a lumber wholesaler, is planning to purchase a load of lumber. He calculates that the probabilities of reselling the load for $9,500, $9,000, or $8,500 are .25, .60, and .15, respectively. On average, how much can Woody sell the lumber for? In the applet below, each dot in the dot plot represents the mean price of 100 random simulated "resellings." Explore the average reselling price by changing the probabilities in cell B2 and B3 (B4 will automatically update).
What is the largest possible mean selling price? What is the least possible mean selling price? What mean selling prices would you consider to be unusual?