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A Firm Must Choose Between Remaining Where It Is, with Current

question 53

Essay

A firm must choose between remaining where it is, with current capacity, and building a new facility with 50% more capacity. The probability of high demand is estimated to be 75%. The current facility would provide $100,000 profit if there is high demand or $50,000 profit if there is low demand. The replacement facility would provide $160,000,000 profit if there is high demand but would only break even if there is low demand. What is the expected value of each option?


Definitions:

Superego

(sue-per-EE-go) The moral system of the personality, which consists of the conscience and the ego ideal.

Angel

A spiritual being believed to act as a messenger of God, typically portrayed as a human figure with wings.

Conscience

An inner sense of right and wrong that guides a person's thoughts and actions.

Ego Ideal

The component of the personality composed of the standards of what one aspires to be, based on societal values and parental expectations.

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