Scenario 5.9: Torrid Texts, a Risk-Neutral New Firm That Specializes in Making

question 33

Multiple Choice

Scenario 5.9:
Torrid Texts, a risk-neutral new firm that specializes in making college textbooks more interesting by inserting contemporary material wherever possible, is planning for next year's production and must decide how many paper producers to contract with. It knows fairly well what the general demand for textbooks is, but is uncertain how faculty will react to this new material. If faculty react very negatively, the firm expects course orders to be down. The executives at Torrid believe that the likelihood of a positive faculty response is 75%. The table below contains profit information under the different possible outcomes.
Producers Faculty Reaction Expected
Contracted Negative Positive Profit
1 $3 million $30 million $23.25 million
2 $1 million $60 million $45.25 million
-Refer to Scenario 5.9. Without additional information, Torrid Texts would

• A) contract with one paper producer in order to guarantee it avoids the worst outcome, $1 million.
• B) contract with two paper producers because $60 million is greater than $30 million.
• C) contract with two paper producers because $61 million is greater than $33 million.
• D) contract with two paper producers because $45.25 million is greater than $23.25 million.
• E) not be able to come to any decision on how many producers to contract with.

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Definitions:

Transverse Processes

Projections on vertebrae where muscles and ligaments attach, part of the bone's anatomy.

Spinous Processes

Bony projections off the back of each vertebra that can be felt through the skin and serve for muscle and ligament attachment.

Winglike Side Projections

Structural or anatomical parts extending from the side of an object or body, resembling the wings of a bird or insect in shape or function.

Bones Of Children

The developing skeletal structure in children, which is characterized by growth plates and undergoes changes as they mature.