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

question 50

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 equal probability rule?

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

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Definitions:

Cost Described

A term that could refer to the detailed explanation or breakdown of the expenses associated with a particular object, activity, or project. If this term is assumed not standard, answer would be NO.

Contribution Margin

The amount by which a product's sales revenue exceeds its variable costs, contributing towards covering fixed costs and generating profit.

Gross Margin

The difference between sales revenue and the cost of goods sold, representing the core profitability of a company's products.

Variable Cost

Costs that vary directly with the level of production or business activity, including expenses such as raw materials and labor.