Consider This Decision Tree,which Represents the Outcomes of Two Alternative

question 2

Multiple Choice

Consider this decision tree,which represents the outcomes of two alternative projects that Ink Inc.,a producer of printers,might pursue.Ink Inc.,needs to borrow $1,000 to pursue either project and is going to sell bonds to finance the venture.
Ink,Inc.,is carrying a large amount of debt because of overexpansion during the dot-com explosion.Under these circumstances,the shareholders would tend to choose:

• A) project A, because it has the highest expected value.
• B) project B, because it has the greatest degree of risk.
• C) project A, because it has the lowest degree of risk.
• D) neither project A nor B, because both are risky.
• E) either project A or B; both have the same degree of risk.

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Definitions:

Opportunity Cost

The cost of forgoing the next best alternative when making a decision, effectively the value of the opportunity lost.

Import Commodities

Goods or services brought into one country from another for the purpose of trade.

Economic Organization

Structured arrangements within an economy that determine how resources are allocated, goods are produced, and services are distributed.

Socialism

A system of economic organization in which (1) the ownership and control of the basic means of production rest with the state and (2) resource allocation is determined by centralized planning rather than by market forces.