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

question 41

Multiple Choice

Refer to the following:
A firm is considering the decision of investing in new plants. It can choose no new plants, one new plant, or two new plants. The following table gives the profits for each choice under three states of the economy. The manager assigns the following probabilities to each state of the economy: the economy expands, 20%, the economy contracts, 40%, or the economy is unchanged 40%.
$\text { The economy }$
$\begin{array}{lccc} & \text { expands }(0.20) & \text { contracts }(0.40) & \text { unchanged }(0.40) \\\hline \text { no new plants } & \$ 10 \text { million } & -\$ 2 \text { million } & \$ 3 \text { million } \\1 \text { new plant } & \$ 20 \text { million } & -\$ 3 \text { million } & \$ 7 \text { million } \\2 \text { new plants } & \$ 30 \text { million } & -\$ 6 \text { million } & \$ 5 \text { million }\end{array}$
-Using the mean variance rules, which decision is correct?

• A) The firm should build no new plants.
• B) The firm should build one new plant.
• C) The firm should build two new plants.
• D) If deciding only between one or two new plants, the firm should build one.
• E) If deciding only between one or two new plants, the firm should build two.

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Definitions:

Broader Social Structure

The complex framework of societal institutions (such as the economy, politics, and social norms) and the relationships between them that shape a society.

Neighbourhood

A geographic area or community within a town or city where people live and interact.

School

An institution for educating children or people at various levels, usually including primary and secondary schools and sometimes tertiary institutions.

Jean Piaget

A Swiss psychologist renowned for his developmental stage theory that children progress through four critical stages of cognitive development.