The Head of Operations for a Movie Studio Wants to Determine

question 160

Multiple Choice

The head of operations for a movie studio wants to determine which of two new scripts they should select for their next major production. (Due to budgeting constraints, only one new picture can be undertaken at this time.) She feels that script 1 has a 70 percent chance of earning about $10,000,000 over the long run, but a 30 percent chance of losing $2,000,000. If this movie is successful, then a sequel could also be produced, with an 80 percent chance of earning $5,000,000, but a 20 percent chance of losing $1,000,000. On the other hand, she feels that script 2 has a 60 percent chance of earning $12,000,000, but a 40 percent chance of losing $3,000,000. If successful, its sequel would have a 50 percent chance of earning $8,000,000, but a 50 percent chance of losing $4,000,000. Of course, in either case, if the original movie were a flop, then no sequel would be produced.
What would be the total payoff if script 1 were a success, but its sequel were not?

• A)$15,000,000
• B)$10,000,000
• C)$9,000,000
• D)$5,000,000
• E)$−1,000,000

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Definitions:

Potential Output

The highest level of economic output that can be achieved sustainably without causing inflation.

Long Run

A period in which all inputs can be adjusted by firms, and all market adjustments have been made.

Nominal Wages

The amount of money received by an employee before any deductions and not adjusted for inflation; the face value of wages.

Potential Output

The highest level of real GDP that can be sustained over the long term without increasing inflation, reflecting the economy's maximum productive capacity.