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

question 28

Multiple Choice

A firm is considering the decision of investing in new plants.The following is the profit payoff matrix under three conditions: it does not expand,it builds two new plants,or it builds one new plant.Three possible states of nature can exist--no change in the economy,the economy contracts and the economy grows.The firm has no idea of the probability of each state. $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { The econdmy }$
$\begin{array}{c}\begin{array}{lll}\\\\\text { no new plants}\\\text { 1 new plant}\\\text { 2 new plants}\end{array}\begin{array}{c}\text { expands } \\\hline \$ 20 \text { million } \\\$ 30 \text { million } \\\$ 40 \text { million }\end{array}\begin{array}{l}\text { contracts } \\\hline-\$ 3 \text { million } \\-\$ 6 \text { million } \\-\$ 12 \text { million }\end{array}\begin{array}{c}\text { unchanged}\\\hline \text { \$ 4 million}\\\text { \$ 6 million}\\\text { \$ 8 million}\end{array}\end{array}$
What decision would be made using the maximax rule?

• A)no new plants
• B)one new plant
• C)two new plants
• D)not enough information to tell

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Definitions:

Taking Possession

The act of acquiring ownership or control over an asset, property, or item.

Distribution Channel

A chain of businesses or intermediaries through which a good or service passes until it reaches the end customer.

Distribution Control

The process of overseeing and managing the movement of goods from the producer to the final consumer.

Financial Costs

The direct monetary expenses incurred by a company in producing, maintaining, and selling a product or service.