Use the following information to answer questions 1 to 5.A firm is deciding whether or not to enter a new market. The decision tree for the firm is provided below.The prompt below the decision tree explains how the decision tree was created.EnterDo Not EnterAllowed0.9Denied0.13ResearchNo ResearchGood0.7Bad0.356ProduceSellProduceSellProduceSell8910High0.75Low0.25High0.25Low0.75High0.6Low0.4Profit (5000s)1200-800-2001200-800-2001400-6000-1000At node 1, the firm must decide whether to enter the new market or not. The cost of attempting to enteris $100,000. The upper branch from node 2 shows that the firm has a 0.9 probability of being allowed toenter the market. If the firm is allowed to enter, it will have to pay $1,500,000 to buy the facilities requiredto become a part of the market. Node 3 shows that the firm will then consider doing a research study toforecast demand for their new product prior to beginning production. The cost of this study is $200,000.Node 4 is a chance node showing the possible outcomes of the market research study. Nodes 5, 6, and 7 aresimilar in that they are the decision nodes for the firm to either produce the products or sell their facilitiesto someone else. The decision to build the complex will result in an income of $3,000,000 if demand is highand $1,000,000 if demand is low. If the firm chooses to sell the facilities and entry into the market, incomefrom the sale is estimated to be $1,600,000. The probabilities shown at nodes 4, 8, and 9 are based on theprojected outcomes of the market research study. 3. What is the maximum cost of the research study that the firm is willing to pay in order to do theresearch?(b(e)$170,000$30,000$200,000$50,000$0

This is clear from the decision tree provided, which shows that the firm is only willing to pay for…

Answered: 3. What is the maximum cost of the…

3. What is the maximum cost of the research study that the firm is willing to pay in order to do the research? (a) $170,000 (b) $30,000 (c) $200,000 (d) $50,000 (e) $0

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter5: Investment Decisions: Look Ahead And Reason Back

Section: Chapter Questions

Problem 5.6IP

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Q44
The following discussion describes a new inventorysystem used by J. C. Penney39:In an industry where the goal is rapid turnaroundof merchandise, J.C. Penney stores now holdalmost no extra inventory of house-brand shirts.Less than a decade ago, Penney would have storedthousands of them in warehouses across the U.S.,tying up capital and slowly going out of style.The entire program is designed and operated byTAL Apparel Ltd., a closely held Hong Kong shirtmaker. TAL collects point-of-sale data for Penney’sshirts directly from its stores in North America foranalysis through a computer model it designed.The Hong Kong company then decides how manyshirts to make, and in what styles, colors, andsizes. The manufacturer sends the shirts directlyto each Penney store, bypassing the retailer’swarehouses and corporate decision makers. a. Discuss how this case illustrates the concept ofthe opportunity cost of capital.b. How does this innovation also help in demandmanagement?
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