Kelly Weeks, President of Weeks Manufacturing, Inc., is considering whether to b

Question

Kelly Weeks, President of Weeks Manufacturing, Inc., is considering whether to build more manufacturing plants in Wisconsin. Her decision is summarized in the following table:

ALTERNATIVES    FAVORABLE MARKET ($)   UNFAVORABLE MARKET ($)

Build a large plant           425,000                                -275,000

Build a small plant             75,000                                 -15,000

Don’t build                              0                                           0

Probabilities                        0.4                                       0.6

a) Construct an opportunity loss table

b) Determine EOL and the best strategy

c) What is the expected value of perfect information?

Explanation / Answer

Status of Nature Alternative Favorable Market Unfavorable Market Build a Large Plant $425,000.00 -$275,000.00 Build a Small Plant $75,000.00 -$15,000.00 Don't Build $0.00 $0.00 Probabilities 0.4 0.6 EMV Build a Large Plant = 0.4 * 425000 + 0.6 * $-275000 = 170000 - 165000 = $5000 EMV Build a Small Plant = 0.6 * 75000 + 0.4 * -15000 = 30000 - 9000 = $21000 EMV Don't Build = $0 Expected Value of Perfect Information It is calculated by multiplying highes payoff with respective probability and then subtracting highest EMV Expected Value|Perfect Information = 0.4 * 425000 + 0.6 * - 15000 = 170000 - 9000 = $161000 Expected Value|Perfect Information - Highest EMV = 161000 - 21000 = 14000 Opportunity Loss table State of Nature Maximum Recommendation Alternative High Demand Low Demand Regret Build a Large Plant $0.00 $275,000.00 $275,000.00 Build a Small Plant $75,000.00 $15,000.00 $75,000.00 Build a Small Plant Don't Build $425,000.00 $0.00 $425,000.00 Minimax Regret Value $75,000.00

Related Questions

Navigate

• Browse (All)
• Browse K
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.