Dee. Criteria: A company is deciding whether to introduce a new product or not.

Question

Dee. Criteria: A company is deciding whether to introduce a new product or not. Should it choose to launch it, it can either subcontract it or manufacture it itself. Based from previous products, the response of the market could either be poor, moderate or strong. The expected payoffs for each course of action under the three scenarios are presented below or rate tron et nothin Sub contract Manu facture 190,000 Which course of action seems best for each of the below-listed criteria for decision-making. List the relevant pay-offs and encircle the best option under each criterion CRITERIA Maximax Maximin Minimax Equally likely EMV Do nothing Sub-contract Manufacture Best Value Assume a probability of 0.4 for poor market, 0.3 for moderate, and 0.3 for strong market What is the expected payoff if we have perfect information? What is the value of perfect information?

Explanation / Answer

Maximax

Maximin

Minimax regret

Equality likely

EMV

* (30,000) x 0.4 + 80,000 x 0.3 + 130,000 x 0.3 = 51,000

Summary Table

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Expected payoff with perfect information = 0 x 0.4 + 80,000 x 0.3 + 190,000 x 0.3 = $81,000

Expected payoff of perfect information = Expected payoff with perfect information - max. EMV = 81,000 - 51,000 = $30,000.

States of nature Max. Alternatives Poor market Moderate Strong market payoff Do nothing $0 $0 $0 $0 Sub contract ($30,000) $80,000 $130,000 $130,000 Manufacture ($70,000) $70,000 $190,000 $190,000

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