The Operations Manager for a Well-Drilling Company Must Recommend Whether

question 41

Multiple Choice

The operations manager for a well-drilling company must recommend whether to build a new facility, expand his existing one, or do nothing. He estimates that long-run profits (in $000) will vary with the amount of precipitation (rainfall) as follows: $$\begin{array} { | l | l | l | l | } \hline { \text { ALTERNATIVE } } & { \text { PRECIPITATION } } \\\hline& \text { LOW } & \text { NORMAL } & \text { HIGH } \\\hline \text { Do Nothing } & - 100 & 100 & 300 \\\hline \text { Expand } & 350 & 500 & 200 \\\hline \text { Build New } & 750 & 300 & 0 \\\hline\end{array}$$ If he feels the chances of low, normal, and high precipitation are 30 percent, 20 percent, and 50 percent respectively, what are expected long-run profits for the alternative he will select?

• A) $140,000
• B) $170,000
• C) $285,000
• D) $305,000
• E) $475,000

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Definitions:

Opportunity Cost

The cost of forgoing the next best alternative when making a decision or choosing to do one thing instead of another.

Imported

Products or services imported from another country for the purpose of selling them.

Exported

Offerings or goods conveyed from one country to another for the objective of transaction or sale.

Production Possibilities Frontier

A curve demonstrating the maximum feasible amount of two goods that can be produced with available resources and technology.