A manufacturing company must decide whether to manufacture a component part or p

Question

A manufacturing company must decide whether to manufacture a component part or purchase the component from a supplier. The resulting profit depends on the demand for the product. Demand can be Low, Medium or High. The company has estimated the payoff (in thousands of dollars) as follows. The payoffs for manufacturing will be -20, 40, and 100 under Low, Medium and High demands respectively. For purchasing, the pay offs will be 10, 45 and 80 for Low, Medium and High demands. Construct a payoff table.

What is the opportunity loss for the decision alternative Purchasing under the state of nature High demand?

a) 100

b) 20

c) 0

d) 80

e) none of the above

Explanation / Answer

THe oppourtunity loss is the amount one missed to gain becasue of the low pay off decision. In current case there are two alternatives are available under high demand with payoff 100 (manufacturing) and 80 (purchaisng). So if one choses, one will lose an oppourtunity to earn 20 more.

Hence, the correct answer is option (b) 20

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