Refer to Figure 5. After conducting more marketing research Spacely feels confid

Question

Refer to Figure 5. After conducting more marketing research Spacely feels confident in assigning probabilities that the market will be good, average, or poor at 0.20, 0.45, and 0.35 respectively. What is the most that Spacely Sprockets should be willing to pay for more accurate probability values?

$52,000

$38,333

$34,400

$25,300

$21,000

$17,300

$9,100

$5,000

$52,000

$38,333

$34,400

$25,300

$21,000

$17,300

$9,100

$5,000

Figure 5. Spacely Sprockets is considering three options for its facility next year. The options (alternatives) and possible outcomes are summarized in the payoff table below Outcomes Good Poor Average Alternatives Market Market Market Expand $40,000 $30,000 $12,000 Move $52,000 $37,000 -$5,000 $21,000 $35,000 $24,000 Do Nothing

Explanation / Answer

Expected(outcomes in Expand)=0.20*40+0.45*30-0.35*12=17.3 (in thousands)
Expected(outcomes in Move)=0.20*52+0.45*37-0.35*5=25.3

Expected(outcome in "do nothing")=0.20*35+0.45*24+0.35-21=25.15

Therefore the maximum amount that he is willing to pay is $25,300

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