An operations manager\'s staff has compiled the information below for four manuf
ID: 405818 • Letter: A
Question
An operations manager's staff has compiled the information below for four manufacturing alternatives (E, F, G, and H) that vary by production technology and the capacity of the machinery. All choices enable the same level of total production and have the same lifetime. The four states of nature represent four levels of consumer acceptance of the firm's products. Values in the table are net present value of future profits in millions of dollars. Forecasts indicate that there is a 0.1 probability of acceptance level 1, 0.2 chance of acceptance level 2, 0.4 chance of acceptance level 3, and 0.3 change of acceptance level 4.
States of Nature
1
2
3
4
Alternative E
50
50
70
60
Alternative F
30
50
80
130
Alternative G
70
80
70
60
Alternative H
-140
-10
150
220
Using the criterion of expected monetary value, which production alternative should be chosen?
States of Nature
1
2
3
4
Alternative E
50
50
70
60
Alternative F
30
50
80
130
Alternative G
70
80
70
60
Alternative H
-140
-10
150
220
Explanation / Answer
Ans:- Expected monetary values are:-
E= 1*50+2*50+4*70+3*60=5+10+28+18=61
F= 1*30+2*50+4*80+3*130=3+10+32+39=84
G= 1*70+2*80+4*70+3*60=7+16+28+18=69
H=1*-140+2*-10+4*150+3*220=-10-2+60+66=110
An operations manager's staff has compiled the information below for four manufacturing alternatives (E, F, G, and H) that vary by production technology and the capacity of the machinery. All choices enable the same level of total production and have the same lifetime. The four states of nature represent four levels of consumer acceptance of the firm's products. Values in the table are net present value of future profits in millions of dollars. Forecasts indicate that there is a 0.1 probability of acceptance level 1, 0.2 chance of acceptance level 2, 0.4 chance of acceptance level 3, and 0.3 change of acceptance level 4. States of nature 1 2 3 4 Alternative E 50 50 70 60 Alternative F 30 50 80 130 Alternative G 70 80 70 60 Alternative H-140-10 150 220 Using the criterion of expected monetary value, which production alternative should be chosen? The expected values are: E = .1*50 + .2*50 + .4*70 + .3*60 = 5 + 10 + 28 + 18 = 61 F = .1*30 + .2*50 + .4*80 + .3*130 = 3 + 10 + 32 + 39 = 84 G = .1*70 + .2*80 + .4*70 + .3*60 = 7 + 16 + 28 + 18 = 69 H = .1 *-140 + .2*-10 + .4*150 + .3*220 = -10 -2 + 60 + 66 = 110 The highest of these occurs with production alternative H.
So production alternative H should be chosen.
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