Question

please help

Scenario 5.8: Risk-neutral Icarus Airlines must commit now to leasing 1, 2, or 3 new airplanes. It knows with certainty that on the basis of business travel alone, it will need at least 1 airplane. The marketing division says that there is a 50% chance that tourism will be big enough for a second plane only. Otherwise, tourism will be big enough for a third plane. This, plus revenue information, yields the following table: Expected Profit Planes Leased Tourism Revenue Light Heavy 2 $90 million $30 million 3 $10 million $140 million $60 million $75 million Refer to Scenario 5.8. Without additional information, Icarus Airlines would lease 3 airplanes because $140 million is greater than $90 million lease 3 airplanes because heavy tourism is more likely than light tourism lease 2 airplanes in order to guarantee it avoids the worst outcome, $10 million lease 3 airplanes because $75 million is greater than $60 million lease only the one airplane it is sure it can use

Answer 1

d. lease 3 airplanes because $75 million is greater than $60 million

(As the airline is risk neutral, so, it will choose the option which maximizes its expected profit and thus it will choose to lease 3 airplanes.)