The MS Company is going to introduce one of three new products: a hammer, a wren
ID: 428691 • Letter: T
Question
The MS Company is going to introduce one of three new products: a hammer, a wrench or a plier. The market conditions (favorable, stable, or unfavorable) will determine the profit or loss the company realizes, as shown in the following payoff table:
Market Conditions
Favorable
Stable
Unfavorable
Product
0.2
0.7
0.1
Hammer
$120,000
$70,000
-$30,000
Wrench
$60,000
$40,000
$20,000
Plier
$35,000
$30,000
$30,000
70 & Wrench
42 & Wrench
70 & Plier
70 & Hammer
31 & Plier
The MS Company is going to introduce one of three new products: a hammer, a wrench or a plier. The market conditions (favorable, stable, or unfavorable) will determine the profit or loss the company realizes, as shown in the following payoff table:
Market Conditions
Favorable
Stable
Unfavorable
Product
0.2
0.7
0.1
Hammer
$120,000
$70,000
-$30,000
Wrench
$60,000
$40,000
$20,000
Plier
$35,000
$30,000
$30,000
What is the maximum expected value and the optimal decision according to the maximum expected value approach? [3pts] Answers:
70 & Wrench
42 & Wrench
70 & Plier
70 & Hammer
31 & Plier
Explanation / Answer
Total profit/loss with product= sum of (Probability of the market condition x Profit/loss)
1. Total profit/loss with Hammer = (0.2 x $120,000)+(0.7 x $70,000)+(0.1 x -$30,000)
= $70,000
2.Total profit/loss with Wrench = (0.2 x $60,000)+(0.7 x $40,000)+(0.1 x $20,000)
=$42,000
3.Total profit/loss with Plier= (0.2 x $35,000)+(0.7 x $30,000)+(0.1 x $30,000)
=$31,000
The maximum expected value=$70,000.
The optimal deecision to produce hammar.
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