Firm X can choose between two technologies, A and B, to produce widgets.

• Technology A will require the firm to pay $30,000 today and will allow the firm to produce UP TO 100,000 widgets one year from now at a variable cost of $1.50 per widget. (Suppose that the production of widgets occur, instantaneously, at t=1.)
• Technology B will cost the firm $75,000 today and will allow the firm to produce UP TO 100,000 widgets at a variable cost of $1 per widget one year from now.
• Suppose that the one-year forward price for widgets is $1.80 per widget. The price of a widget next year will be either $1.20 if the economy is bad or $2.20 if the economy is good.
• Assume thatrf=5% and that after producing the widgets at t = 1, both technologies become totally obsolete and you will cease all production.
• a. Suppose that both technologies force the firm to produce 100,000 widgets one year from today. What is the firm's value and which technology should Firm X choose?
• b. [More challenging] Now suppose that the firm makes the technological choice at t = 0, pays the fixed cost today ($30k for Tech. A, or $75k for Tech B), but can wait until t = 1 to decide how many, if any, widgets to produce. What is the firm's value and which technology should Firm X choose in this case?