Figure 12-3 The Lee Company Must Choose Between Two Mutually Exclusive Alternatives

question 28

Multiple Choice

Figure 12-3
The Lee Company must choose between two mutually exclusive alternatives. With alternative 1 an inferior product will be marketed that is best suited to low levels of demand whereas alternative 2 is a superior product that is best suited to high levels of demand. There are only two possible levels of demand - high and low and the probabilities of each event occurring is 0.5. The predicted profits for each alterative are:
-Refer to Figure 12-3. Using the data above relating to the Lee Company, which alternative should be selected using the regret criterion?

• A) Neither alternative
• B) Alternative 1
• C) Alternative 2
• D) It is not possible to use the regret criterion for the data given.

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Definitions:

Marginal Cost

Marginal cost is the change in total cost that arises when the quantity produced changes by one unit. It's pivotal in decision-making processes regarding increasing or decreasing production.

Marginal Revenue

The extra financial gain from selling an additional unit of a product or service.

Profit

The profit earned when the revenue generated from a business operation surpasses all its associated expenses, costs, and taxes required for the operation.

Competitive Market

A market structure characterized by a large number of buyers and sellers, where no single participant can significantly influence price or supply.