The Owner of Tastee Cookies Needs to Decide Whether to Lease

question 110

Multiple Choice

The owner of Tastee Cookies needs to decide whether to lease a small, medium, or large new retail outlet. She estimates that monthly profits will vary with demand for her cookies as follows: If she feels there is a 30 percent chance that demand will be high, what is her expected value of perfect information?

• A) $1,600
• B) $1,100
• C) $1,000
• D) $900
• E) $500

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Definitions:

Demand Schedule

A table or graph showing the quantity of a product that consumers are willing and able to purchase at various prices over a specified period of time.

Law Of Demand

The principle that, other things equal, an increase in a product’s price will reduce the quantity of it demanded, and conversely for a decrease in price.

Price-Elasticity Coefficient

A numerical measure of the responsiveness of the quantity demanded or supplied of a good to a change in its price.

Elastic

A term in economics that describes the sensitivity of demand or supply to changes in price or income.