Refer to the Following:
a Firm Making Production Plans Believes

question 31

Multiple Choice

Refer to the following:
A firm making production plans believes there is a 30% probability the price will be $10, a 50% probability the price will be $15, and a 20% probability the price will be $20. The manager must decide whether to produce 6,000 units of output (A) , 8,000 units (B) or 10,000 units (C) . The following table shows 4 possible outcomes depending on the output chosen and the actual price.
$$\begin{array} { c c c c } & { \text { Prodi } ( \text { Loss } ) \text { when price is } } \\\hline \text { Prodiction } & \$ 10 & \$ 15 & \$ 20 \\\hline \text { G,000 } ( A ) & - \$ 200 & \$ 400 & \$ 1,000 \\\text { B,000 } ( B ) & - \$ 400 & \$ 600 & \$ 1,600 \\10,000 ( C ) & - \$ 1,000 & \$ 800 & \$ 3,000\end{array}$$
-For the above payoff matrix, suppose the manager has no idea about the probability of any of the three prices occurring. If the maximax rule is used how much will the firm produce?

• A) 6,000
• B) 8,000
• C) 10,000
• D) can't use this rule to make the decision

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Definitions:

Annuities

Financial products that provide a series of payments at regular intervals, often used as an income stream for retirees.

Present Values

The current worth of a future sum of money or stream of cash flows given a specified rate of return.

Compounded Annually

Refers to the calculation of interest where the amount is added to the principal at the end of each year, affecting the total interest over time.

Present Value

The market value now of a future financial amount or cash flows, factoring in a specific rate of gain.