Question

An industry has been growing and having difficulty meeting the demand for its products recently.​ So, the firm is considering three options to address this​ issue: It can move to a larger​ facility, add a second​ shift, or hire a subcontractor to produce the​ company's products. The annual payoff of each option depends if the demand continues to​ expand, holds​ steady, or declines. The expected payoff for each combination shown in the accompanying table. Complete parts a and b.

                              DEMAND LEVEL

ALTERNATIVE	EXPANDS	HOLDS STEADY	DECLINES
Move to a larger facility	$370,000	$150,000	-$70,000
Add a second shift	$270,000	$70,000	-$60,000
Subcontract	$230,000	$60,000	-$60,000
Probability	0.37	0.42	0.21

a. Choose the best alternative using decision making under risk.

Select alternative ____________ because it has the ________ expected monetary value under risk (EVUR), equal to $_____.

b. What is the expected value of perfect​ information ?

(EVPI= EVUC- EVUR)

Answer 1