Scenario 5.5: Engineers at Jalopy Automotive Have Discovered a Safety Flaw in Flaw

question 50

Multiple Choice

Scenario 5.5:
Engineers at Jalopy Automotive have discovered a safety flaw in their new model car. It would cost $500 per car to fix the flaw, and 10,000 cars have been sold. The company works out the following possible scenarios for what might happen if the car is not fixed, and assigns probabilities to those events:
Scenario Probability Cost
A. No one discovers flaw .15 $0
B. Government fines firm .40 $10 million
(no lawsuits)
C. Resulting lawsuits are lost .30 $12 million
(no government fine)
D. Resulting lawsuits are won .15 $2 million
(no government fine)
-Refer to Scenario 5.5. Which of the following statements is true?

• A) The expected cost of not fixing the car is less than the cost of fixing it.
• B) The expected cost of not fixing the car is greater than the cost of fixing it.
• C) It is not possible to tell whether the expected cost of fixing the car is less than the cost of fixing it, because the probabilities are subjective.
• D) It is not possible to tell whether the expected cost of fixing the car is less than the cost of fixing it, because the probabilities are not equal.

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Definitions:

Trade Restrictions

Measures imposed by governments to regulate or limit the trade of goods and services across borders.

Economic Vitality

Economic Vitality describes the strength and robustness of an economy, often measured by the level of business activity, employment rates, and gross domestic product growth.

Recessionary Phase

A period in the economic cycle when the economy is declining, characterized by reduced industrial activity, trade, and consumer spending.

Real Estate

Property consisting of land and the buildings on it, along with its natural resources, and engaged in the buying, selling, and renting of these properties.