Refer to the Following:
a Firm Is Considering the Decision $\text { The economy }$

question 22

Multiple Choice

Refer to the following:
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.
$\text { The economy }$
$\begin{array}{lccc} & \text { expands } & \text { contracts } & \text { unchanged } \\\hline \text { no new plants } & \$ 20 \text { million } & -\$ 3 \text { million } & \$ 4 \text { million } \\1 \text { new plant } & \$ 30 \text { million } & -\$ 6 \text { million } & \$ 6 \text { million } \\2 \text { new plants } & \$ 40 \text { million } & -\$ 12 \text { million } & \$ 8 \text { million }\end{array}$
-What decision would be made using the maximum expected value rule?

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

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Definitions:

Indirect Costs

Expenses that are not directly attributable to the production of goods or delivery of services but are necessary for the operation of a business, such as utilities or rent.

Cost Object

Anything for which a separate measurement of costs is desired, such as a product, service, project, or activity.

Upstream Cost

Expenses related to the exploration, development, and production phases in industries such as oil and gas.

Marketing

The process of promoting, selling, and distributing a product or service, including market research and advertising.