Scenario 5.8: Risk-Neutral Icarus Airlines Must Commit Now to Leasing 1, 2

question 77

Multiple Choice

Scenario 5.8:
Risk-neutral Icarus Airlines must commit now to leasing 1, 2, or 3 new airplanes. It knows with certainty that on the basis of business travel alone, it will need at least 1 airplane. The marketing division says that there is a 50% chance that tourism will be big enough for a second plane only. Otherwise, tourism will be big enough for a third plane. This, plus revenue information, yields the following table:
Planes Tourism Revenue Expected
Leased Light Heavy Profit
2 $90 million $30 million $60 million
3 $10 million $140 million $75 million
-Refer to Scenario 5.8. Without additional information, Icarus Airlines would

• A) lease only the one airplane it is sure it can use.
• B) lease 2 airplanes in order to guarantee it avoids the worst outcome, $10 million.
• C) lease 3 airplanes because $140 million is greater than $90 million.
• D) lease 3 airplanes because $75 million is greater than $60 million.
• E) lease 3 airplanes because heavy tourism is more likely than light tourism.

Assess the regressive nature of certain taxes and identify exceptions.

Understand the basic concepts of tax incidence and how taxes affect market equilibrium.

Identify and distinguish between progressive, regressive, and proportional tax schedules.

Analyze the impact of price elasticity on the distribution of tax burdens between buyers and sellers.

---

Definitions:

Private Accountants

Accountants employed by a single company to handle its financial records, analysis, and reporting.

Business Enterprises

Organizations engaged in commercial, industrial, or professional activities, aiming to earn profits.

External Transactions

Transactions that involve parties outside the organization, impacting the financial position of the business.

Economic Events

Transactions and occurrences that affect the financial position of a business entity.