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?

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Definitions:

Quantity Supplied

The amount of a good or service that producers are willing to sell at a given price over a specific period.

Increase in Quantity

An increase in quantity refers to a rise in the number of units produced or sold of a particular good or service.

Demand

The amount of a particular product or service that consumers are willing and able to purchase at various prices.

Suppliers

Entities that provide goods or services to consumers or other businesses, often in exchange for financial compensation.