Fig. 17-2 in Froeb & McCann shows a decision tree for deciding whether to enter
ID: 1198900 • Letter: F
Question
Fig. 17-2 in Froeb & McCann shows a decision tree for deciding whether to enter a new market. Because the expected value of entering ($1) was greater than the expected value of not entering ($0), the decision was to enter. Why might the decision maker decide not to enter even though the expected value of entering was greater than that of not entering?
A. He’s not confident in the estimated probabilities of his competitor’s pricing behavior.
B. Entering the market requires a big investment in specialized capital with no alternative uses.
C. Even if successful, the new market will add only 2% to company profits. The decision maker needs to spend his scare managerial time on projects with more substantial growth potential.
D. All of the above
Explanation / Answer
Because entering the market requires a big investment in specialized capital with no alternative uses.
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