The Operations Manager for a Local Bus Company Wants to Decide

question 170

Multiple Choice

The operations manager for a local bus company wants to decide whether he should purchase a small, medium, or large new bus for his company. He estimates that the annual profits (in $000) will vary depending upon whether passenger demand is low, medium, or high, as follows:

If he feels the chances of low, medium, and high demand are 30 percent, 30 percent, and 40 percent respectively, what is his expected value of perfect information?

• A)$15,000
• B)$61,000
• C)$69,000
• D)$72,000
• E)$87,000

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Definitions:

Joint Cost Function

A concept in economics where certain costs are incurred to produce multiple products simultaneously, making it challenging to allocate the costs distinctly to each product.

Economies of Scope

Cost advantages that enterprises obtain through the variety of products rather than through a high volume of a single product.

Cost Function

A mathematical relationship describing how production costs change with changes in the quantity of output produced.

Economies of Scope

Economies of scope occur when it is more cost-effective for a company to produce two or more products together rather than separately.