solution

A. If the firm has to make the decision before knowing the demand, what decision maximizes the expected net profit of the firm?

Build a large plant

Build a small plant

Do not expand

All decisions lead to the same expected net profit

No decision maximizes the expected net profit

B. What is the maximum expected net profit of the firm if the firm has to make the decision before knowing the demand?

$200,000

$440,000

$450,000

$460,000

$500,000

C. If the firm is able to find out the demand before making the decision, how much is the firm’s willingness to pay for the perfect information?

$120,000

$150,000

D. A marketing company approaches you and offers to make an advertisement for your product line. With the advertisement, the probability for a strong demand increases to 0.8, and the probability for a weak demand decreases to 0.2.

What is the value of this offer?

$100,000

$120,000

$140,000

$160,000

$200,000

$180,000

$220,000

$240,000