Refer to the Following:
a Firm Making Production Plans Believes

question 25

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 maximin 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:

Project

A temporary endeavor with a defined beginning and end, undertaken to meet unique goals and objectives, typically to bring about beneficial change or added value.

Incremental Cash Flow

The additional cash flow a company generates from taking on a new project, representing the difference between the company's cash flow with the project and without it.

Erosion Costs

The negative financial impact resulting from a new project or investment, particularly affecting existing revenue or assets.

Sunk Costs

Costs that have already been incurred and cannot be recovered or influenced by any decision made now or in the future.