4. Modern Electronics specializes in manufacturing modern electronic components.
ID: 2744961 • Letter: 4
Question
4. Modern Electronics specializes in manufacturing modern electronic components. It also builds the equipment that produces the components. Modern Electronics is considering building a new facility but the estimated profits would be impacted by the type of market that develops. The probability for a strong market is 0.3; for a fair market is 0.3; and for a poor market is 0.4. You are responsible for advising the president of Modern Electronics on the type facility that should be built or to not build a facility at all. The table shows the estimated profits under each market and for each size facility.
Explanation: You can use QM for Windows->Decision Analysis->Decision Table with the above information.
Estimated Profits
Strong Market
Fair Market
Poor Market
Build a large facility
30,000
25,000
-20,000
Build a medium-size facility
27,500
25,000
-10,000
Build a small facility
15,000
12,500
-1000
Do not build a facility
0
0
0
What is your recommendation to the president based on expected value that maximizes profits (EMV).
Answer:
Explanation (include expected monetary value):
Software Output:
Provide a second recommendation to the president that minimizes regret.
Explanation (include expected monetary value):
Software Output:
Estimated Profits
Strong Market
Fair Market
Poor Market
Build a large facility
30,000
25,000
-20,000
Build a medium-size facility
27,500
25,000
-10,000
Build a small facility
15,000
12,500
-1000
Do not build a facility
0
0
0
Explanation / Answer
EMV (Alternative i) = [(Payoff of 1st state of nature) x (Probability of 1st state of nature)] + [(Payoff of 2nd state of nature) x (Probability of 2nd state of nature)] + [(Payoff of last state of nature) x (Probability of last state of nature)]
Build a large facility = (30,000 x 0.30) + (25,000 x 0.30) + (-20,000 x 0.40) = 10,500
Build a medium-size facility = (27,500 x 0.30) + (25,000 x 0.30) + (-10,000 x 0.40) = 12,750
Build a small facility = (15,000 x 0.30) + (12,500 x 0.30) + (-1000 x 0.40) = 7,950
Do not build a facility = (0 x 0.30) + (0 x 0.30) + (0 x 0.40) = 0
As per EMV, we should build a medium-size facility as it maximizes profits the most.
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