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Question

Read the following fictional scenarioand write a report that addresses the questions shown below:

The managing director of a Belgian outdoor catering company has to decide whether or not to lease new capital equipment. She knows that the demand for their services will depend on the situation in the macroeconomy in Belgium. The possible outcomes are summarised in this contingency table:

Demand Conditions

Probability

Leasing

No leasing

Profit

Utility

Profit

Utility

Above normal

0.25

80

92

60

76

Normal

0.50

50

40

34

60

Below normal

0.25

0

0

20

20

Profits are measured in 000s of € and Utility is measured in 000s of Utils.

1. Explain what is meant by the term ‘expected profit’. What would the expected profit from each decision?

Assessment criteria

Effectiveness of the explanation of expected profit

Structure and presentation of material, including the use of the Harvard Citation and Referencing system

Reading

The following references are starting points for your reading about this task:

Frank, R.H. (2003) Microeconomics and Behavior. 5^th ed., New York: McGraw-Hill – pp. 209-223

Pindyck, R.S. and Rubinfeld, D.L. (2013) Microeconomics. 8^th ed., International edition, New Jersey: Pearson – Chapter 5