Firm X Is Currently Selling a Consumer Good at a Standard

question 15

Essay

Firm X is currently selling a consumer good at a standard price, but is also considering cutting its price. The main risk facing the firm concerns the course of the economy in the near-term: whether the economy will grow at a steady pace (G) or whether it will experience a recession (R). The table below shows the firm's possible profit results (in $ millions). Finally, the firm judges that there is a 70% chance of growth and a 30% chance of a recession.
$\begin{array} { | l | c | c | } \hline & \text { Growth } & \text { Recession } \\\hline \text { Standard Price } & 20 & - 10 \\\hline \text { Cut Price } & 15 & 0 \\\hline\end{array}$ (a) Firm X must make its decision now (before knowing the future course of the economy). Which pricing policy maximizes its expected profit?
(b) Now suppose that Firm X can wait and decide its pricing decision after it knows the course of the economy. Determine its best pricing decisions and its overall expected profit.
(c) Firm X has hired a macroeconomic forecaster. The macro forecast is either positive (+) or negative (–). In the past, the forecaster has made positive forecasts prior to 4 of 7 periods of economic growth: Pr(+|G) = 4/7. In turn, he has made negative forecasts prior to 2 of 3 recessions: Pr(–|R) = 2/3. Compute Pr(G|+) and Pr(G|–)
(d) Suppose the forecasting report can be purchased for $.2 million. Should Firm X buy the report? Explain your answer.

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Definitions:

Transmembrane Protein

A type of protein that spans across the lipid bilayer of cell membranes, facilitating various cellular functions including transport and signaling.

Concentration Gradient

The gradual difference in the concentration of solutes in a solution between two regions, often leading to diffusion from an area of higher concentration to lower concentration.

Electrochemical

Pertains to the branch of chemistry focused on the relationship between electrical and chemical phenomena, specifically, the movements of electrons and ions.

Concentration Gradient

A variation in the concentration of a substance across a distance, which can result in the movement of particles through diffusion or osmosis.