Firm X Is Currently Selling a Consumer Good at a Standard

question 32

Essay

Firm X is currently selling a consumer good at a standard price,but is also considering cutting its price.The main risk facing the firm concerns the course of the economy in the near-term: whether the economy will grow at a steady pace (G)or whether it will experience a recession (R).The table below shows the firm's possible profit results (in $ millions).Finally,the firm judges that there is a 70% chance of growth and a 30% chance of a recession.
(a)Firm X must make its decision now (before knowing the future course of the economy).Which pricing policy maximizes its expected profit?

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Definitions:

Fixed Resource

An asset or resource in production that cannot be easily increased or decreased in the short term, such as land or machinery.

Diminishing Returns

The principle that says as more of a variable input is added to a fixed input, the incremental gain in output will eventually decrease.

Normal Profits

The level of profit that is necessary to cover the costs of a firm, including the opportunity costs of capital, ensuring the firm remains in business.

Implicit Cost

The opportunity cost equal to what a firm must give up in order to use resources it already owns, without paying rent or purchasing them.