A Firm Is Considering the Decision of Investing in New $$\text { The econdmy }$$

question 58

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. $$\text { The econdmy }$$
$\begin{array}{l|ccc}& \text { expands } & \text { contracts } & \text { unchanged } \\\text { no new plants } & \$ 20 \text { million } & -\$ 3 \text { million } & \$ 4 \text { million } \\1 \text { new plant } & \$ 30 \text { million } & -\$ 6 \text { million } & \$ 6 \text { million } \\2 \text { new plants } & \$ 40 \text { million } & -\$ 12 \text { million } & \$ 8 \text { million }\end{array}$ What decision would be made using the maximin rule?

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

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Definitions:

Fixed Selling

Refers to the selling expenses that do not change with the level of sales.

Financial Disadvantage

A situation where a person or entity is in a less favorable financial position compared to others due to various factors.

Fixed Manufacturing Overhead

The portion of manufacturing overhead costs that remains constant regardless of the volume of production, including expenses such as factory rent and salaries of permanent staff.

Avoidable Cost

Expenses that can be eliminated if a particular decision or action is avoided.