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:

Cyclical Pattern

A sequence of events or phenomena that recur in a regular, predictable cycle or series.

Domestic Violence

A pattern of behavior in any relationship that is used to gain or maintain power and control over an intimate partner, including physical, sexual, emotional, economic, or psychological actions or threats.

Patriarchal

Related to a social system where men hold primary power and predominate in roles of political leadership, moral authority, social privilege, and control of property.

Emotionally Distant

Refers to individuals who are not easily open to sharing their feelings or forming close emotional connections with others.