Consider the Following Project Data: (1) a $500 Feasibility Study

question 65

Multiple Choice

Consider the following project data: (1) A $500 feasibility study will be conducted at t = 0.
(2) If the study indicates potential, the firm will spend $1,000 at t = 1 to build a prototype. The best estimate now is that there is an 80 percent chance that the study will indicate potential, and a 20 percent chance that it will not.
(3) If reaction to the prototype is good, the firm will spend $10,000 to build a production plant at t = 2. The best estimate now is that there is a 60 percent chance that the reaction to the prototype will be good, and a 40 percent chance that it will be poor.
(4) If the plant is built, there is a 50 percent chance of a t = 3 cash inflow of $16,000 and a 50 percent chance of a $13,000 cash inflow.

• A) -$35
• B) -$12
• C) $ 0
• D) $12
• E) $35

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Definitions:

Monopolistically Competitive

A market structure where many firms sell products that are similar but not identical, allowing for competition based on quality, price, and branding.

Long-run Equilibrium

A state in which all firms in a competitive market are making just enough profit to stay in business, with no incentive to enter or leave the market.

MR = MC

A condition where a firm's marginal revenue (MR) equals its marginal cost (MC), commonly used to determine the profit-maximizing level of output.

ATC

Stands for Average Total Cost, which is the cost per unit of output, calculated by dividing the total cost by the quantity produced.