The alternatives 1 and 2 in the following payoff table represent the two possibl

Question

The alternatives 1 and 2 in the following payoff table represent the two possible manufacturing strategies that the EKA manufacturing company can adopt. The level of demand affects the success of both strategies. The states of nature (Si) represent the levels of demand for the company products. S1, S2 and S3 characterize high, medium, and low demand respectively. The payoff values are in thousands of dollars.

States of Nature

S1

S2

S3

Alternative (strategy) 1

10

40

70

Alternative (strategy) 2

60

120

50

Given that the states of nature (S1) represent the levels of demand for the company products. S1, S2 and S3 characterize high, medium and low demand with probability of high demand is .2, while the probability of low demand is .25.

Best decision is strategy 2 with an expected profit of 76.67

Best decision is strategy 1 with an expected profit of 41.5

Best decision is strategy 2 with an expected profit of 90.5

Best decision is strategy 1 with an expected profit of 90.5

States of Nature

S1

S2

S3

Alternative (strategy) 1

10

40

70

Alternative (strategy) 2

60

120

50

Explanation / Answer

Probability of High demand = 0.20

Probability of low demand = 0.25

Probability of Medium Demand = 1- 0.20 - 0.25 = 0.55

For alternative strategy 1

Expected Profit = 10 * 0.20 + 40 * 0.55 + 70 * 0.25 = $ 41.5

For alternative strategy 2

Expected Profit = 60 * 0.20 + 120 * 0.55 + 50 * 0.25 = $ 90.5

so, best decisionis strategy 2 with an expected profit of $ 90.5

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