Firm X Is Currently Selling a Consumer Good and Faces

Essay

Firm X is currently selling a consumer good and faces two related decisions, one with respect to pricing and the other with respect to marketing. With respect to pricing, it can maintain its "standard" price or it can adopt a lower "discount" price. With respect to marketing, it can keep with its current advertising campaign or it can expand its advertising. The main risk facing the firm concerns the course of the economy in the near-term: whether the economy will continue healthy growth or whether it will experience a recession. The table below shows the firm's possible profit results (in $ millions) depending on its price and advertising actions. Finally, the firm judges that there is an 80% chance of growth and a 20% chance of a recession.
$\begin{array}{lcc}&\text { Growing}&\text { Recession }\\&\text { Economy}&\\\text { Standard P + Level Ads } & 25 & -20 \\\text { Discount P + Level Ads } & 15 & 0 \\\text { Standard P + Increased } & 30 & -45 \\\text { Ads } & & \\\text { Discount P + Increased } & 20 & -10\\\text { Ads } & & \end{array}$

(a) Firm X must make its decision now (before knowing the future course of the economy). Which of the four alternatives maximizes its expected profit?