Aplant manager wants to know how much he should be willing to pay for perfect market research. currently there are two states of nature facing his decision to expand or do nothing. under favorable market conditions the manager would make $100,000 for the large plant and $5,000 for the small plant. under unfavorable market conditions the large plant would lose $80,000 and the small plant would make $0. if the two states of nature are equally likely, how much should he pay for perfect information?
a. 55,000b. $25,000c. unable to determine with this informationd. $15,000e. $0

Option (B) is correct.

Explanation:

Probability:

Favorable Market condition(P1) = 0.5

Unfavorable Market Condition(P2) = 0.5

Small plant:

Favorable Market condition = $5,000

Unfavorable Market Condition = $0

Therefore,

Total Expected to make from small plant:

= P1 × $5,000 + P2 × $0

= 0.5 × $5,000 + 0.5 × $0

= $2,500

Large plant:

Favorable Market condition = $100,000

Unfavorable Market Condition = (-$50,000)

Therefore,

Total Expected to make from small plant:

= P1 × $100,000 + P2 × (-$50,000)

= 0.5 × $100,000 + 0.5 × (-$50,000)

= $50,000 - $25,000

= $25,000

From the above calculation, if he goes for a small plant he can make $2,500 and if he goes for a large plant he can make $25,000 so maximum he can make is $25000 so he can maximum pay $25000 only for research.

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answer: in the short-run firms will respond by raising the price of turkey.

explanation: initially the long-run equilibrium is at a price of $5 per pound of turkey and a quantity of 50 million pounds per year. now, when webmd claims that a protein found in turkey will increase your expected lifespan by 4 years. the consumers demand for turkey will increase at every price shifting the demand curve to the right from d1 to d2. while, there will be no change in the supply curve in the short-run as it is not possible for producers to adjust supply so quickly. as a result the new equilibrium will occur at a higher price and a higher quantity of turkey.

thus, in the short run firms will respond by increasing the price of turkey, selling more quantity at a higher price and earning economic profits.