68. A small parts manufacturer has just engineered a new product for the autn in

Question

68. A small parts manufacturer has just engineered a new product for the autn industry. In order to produce the part the company can expand existing faci acquire a competitor, or subcontract production. The company believes the product will either experience high market demand or low market demand, w probabilities of 0.6 and 0.4, respectively The following payoff table describe s decision situation. States of Nature ision High Demand Low Demand (0.6) (0.4) nd Facilities $2,000 Acquire Competitor 760,000 500,000 Subcontract Production 250,000 25,000 The expected value for the expand facilities decision is a. $250,000 b. $160,000 c. $700,000 d. $1,200,000

Explanation / Answer

Expected Value of Decision = Probability of High Demand * Pay off because of High Demand + Probability of Low Demand * Pay off because of Low Demand

Expected Value of Expand Facilities Decision = 0.6*2000000 + 0.4*-1250000 = 700000

Answer C)

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