The Operations Manager for a Local Bus Company Wants to Decide

question 28

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: $$\begin{array} { | l | c | c | c | } \hline \text { Bus } &&{ \text { DEMAND } } \\\hline & \text { LOW } & \text { MEDIUM } & \text { HIGH } \\\hline \text { Small } & 50 & 60 & 70 \\\hline \text { Medium } & 40 & 80 & 90 \\\hline \text { Large } & 20 & 50 & 120 \\\hline\end{array}$$
If he uses the maximin criterion, which size bus will he decide to purchase?

• A) small
• B) medium
• C) large
• D) either small or medium
• E) either medium or large

---

Definitions:

Shutdown Point

The shutdown point refers to the level of output and price at which a company cannot cover its variable costs, leading it to cease operations temporarily.

Profit Maximizing Level of Output

The quantity of production that yields the highest possible profit for a firm, determined by the point where marginal cost equals marginal revenue.

Average Total Cost Curves

Graphs that show the average total cost of producing different quantities of output, typically U-shaped due to economies and diseconomies of scale.

Economic Profits

The difference between a firm's total revenue and its total costs, including both explicit and implicit costs, representing the excess over the opportunity cost.