Posted by JO on Sunday, April 18, 2010 at 3:01am.
. Remox Corporation is a British firm that sells high-fashion sportswear in the United States. Congress is currently considering the imposition of a protective tariff on imported textiles. Remox is considering the possibility of moving 50 percent of its production to the United States to avoid tariff. This would be accomplished by opening a plant in the United States. The following table lists the profit outcomes under various scenarios:
Profit in 2008
No Tariff Tariff
Option A: Produce all output in Britain $1,200,000 $ 800,000
Option B: Produce 50% in the United States $ 875,000 1,000,000
Remox hires a consulting firm to assess the probability that a tariff on imported textiles will in fact pass a congressional vote and not be vetoed by the president. The consultants forecast the following probabilities:
Tariff will pass 30%
Tariff will fail 70
a. compute the expected profits for both options.
b. based on the expected profit only, which option should Remox choose?
c. Compute the probabilities that would make Remox indifferent between options A and B using that rule.
d. Compute the standard deviations for options A and B facing Remox Corporation.
e. What decision would Remox make using the mean-variance rule?
f. What decision would Remox make using the coefficient of variation rule?
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