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:

Absolute Advantage

The ability of a party to produce a greater quantity of a good, product, or service than competitors, using the same amount of resources.

Banana Production

The cultivation, harvesting, and processing of bananas, typically for consumption as food or for use in various products.

Comparative Advantage

The ability of an individual or firm to produce a good or service at a lower opportunity cost than other producers.

Absolute Advantage

The capacity of a person, corporation, or nation to manufacture a product or provide a service at a lower unit cost than rival entities.