1 APEC Ltd, well-known publishers of economic textbooks, are considering the publication of a new book, Managerial Economics for Beginners. If the book is produced it will cost 1000 to set up by the printing press and 2.00 for every copy made, and will sell for 5.00 per copy. APEC have studied the market and derived the following probability distribution of potential sales: Market reception Good Average Sales 2000 1000 500 0 Probability 0.2 0.5 0.2 0.1 Poor Bad Once the decision to produce is made, the firm can produce any of the above amounts (0, 500, 1000, 2000), but must produce all the books in one produc- tion run because the press is needed for something else (i.e. the firm cannot initially produce 500 books and then produce more if sales are good).

(i) Should APEC produce the book, and, if so, how many copies to maxi- mise expected profits? (ii) Suppose any unsold books can be exported, at a reduced price of 3.00 per copy. What will be the new optimal decision, to minimise expected opportunity losses? (iii) How will the decision be influenced by the fact that APEC is experienc- ing a financial crisis, so that any losses could be disastrous? (iv) What assumptions are made throughout? 2 (i) An engineering firm about to undertake a production run of 1000 units must decide whether to overhaul the production machinery. The machin- ery has a failure rate given by the following probability distribution. Failure rate 0.01 0.02 0.03 Probability 0.5 0.3 0.