A Firm Is Considering the Decision of Investing in New $\quad$

question 26

Multiple Choice

A firm is considering the decision of investing in new plants.It can choose no new plants,one new plant,or two new plants.The following table gives the profits for each choice under three states of the economy.The manager assigns the following probabilities to each state of the economy: the economy expands,20%,the economy contracts,40%,or the economy is unchanged 40%. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { The economy }$
$\begin{array}{lccc} & \text { expands }(0.20) & \text { contracts }(0.40) & \text { unchanged }(0.40) \\ \text { no new plants } & \$ 10 \text { million } & -\$ 2 \text { million } & \$ 3 \text { million } \\1 \text { new plant } & \$ 20 \text { million } & -\$ 3 \text { million } & \$ 7 \text { million } \\2 \text { new plants } & \$ 30 \text { million } & -\$ 6 \text { million } & \$ 5 \text { million }\end{array}$
Using the mean-variance rules,which decision is correct?

• A)The firm should build no new plants.
• B)The firm should build one new plant.
• C)The firm should build two new plants.
• D)If deciding only between one or two new plants,the firm should build one.
• E)If deciding only between one or two new plants,the firm should build two.