A Company Is Trying to Decide Whether to Build a Large

question 25

Essay

A company is trying to decide whether to build a large plant or a small plant to supply future sales of a new product.However,it is uncertain about the market response to the product;whether demand will be strong or weak.According to the firm's marketing department,the probability of strong demand is 0.3 and of weak demand is 0.7.The table below lists the firm's profits (in millions of dollars)depending on plant capacity and the market response:
(a)The company must make its plant decision now,before it will know what the market response will be.Which plant size maximizes its expected profit?

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Definitions:

Extinction

In behavioral psychology, the process by which a conditioned response decreases in frequency and eventually disappears, often due to the conditioned stimulus being presented repeatedly without the unconditioned stimulus.

Higher-Order Conditioning

A process in classical conditioning in which a conditioned stimulus is paired with a new neutral stimulus, creating a second (often weaker) conditioned response.

Generalization

The process by which an animal or a person responds to a new stimulus in a way that's similar to how they responded to a previously encountered stimulus.

Operant Conditioning

An approach to education that utilizes incentives and penalties to shape behavior.