ABC company has to decide whether to build a new plant. ABC is contemplating whether to build the plant at a full scale or first build a pilot plant and based on the performance of the pilot plant, then build the full-scale plant. An estimated cost to build the full-scale plant is $400,000. If the new plant works, ABC could realize a profit of $850,000. If it fails due to a downturn of economy, ABC could realize a profit of only $200,000. You as a consultant estimates 45 percent chance the new plant would work. The other option is to build a pilot plant first and based on its success, then build a larger plant. The pilot plant would cost $30,000 to build. There is 60% chance the plant will work. If pilot plant works, there is a 70 percent that the larger plant, if it is built, will work. If the pilot plant does not work, there is a still 20 percent chance that the larger plant, if built, will work. You, as a consultant, know how to make a decision tree. Analyze this problem by making a decision tree diagram and decide for ABC what decisions ABC should make. Write all payoffs and expected values (show calculations). Write your decision clearly or a sequence of decisions in your words.

ABC company has to decide whether to build a new plant. ABC is contemplating whether to build the plant at a full scale or first build a pilot plant and based on the performance of the pilot plant, then build the full-scale plant. An estimated cost to build the full-scale plant is $400,000. If the new plant works, ABC could realize a profit of $850,000. If it fails due to a downturn of economy, ABC could realize a profit of only $200,000. You as a consultant estimates 45 percent chance the new plant would work. The other option is to build a pilot plant first and based on its success, then build a larger plant. The pilot plant would cost $30,000 to build. There is 60% chance the plant will work. If pilot plant works, there is a 70 percent that the larger plant, if it is built, will work. If the pilot plant does not work, there is a still 20 percent chance that the larger plant, if built, will work. You, as a consultant, know how to make a decision tree. Analyze this problem by making a decision tree diagram and decide for ABC what decisions ABC should make. Write all payoffs and expected values (show calculations). Write your decision clearly or a sequence of decisions in your words.

ECON MICRO

5th Edition

ISBN:9781337000536

Author:William A. McEachern

Publisher:William A. McEachern

Chapter7: Production And Cost In The Firm

Section: Chapter Questions

Problem 1.3P

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