7 Decentralization: You want to introduce lean manufacturing at your plant, but you are not sure whether it will work or not. You think that the outcome is equally likely to be great (incremental profit = 10), good ( = 5), ok ( = 1), or bad ( = M with M = 4). Your plant manager, who actually understand manufacturing knows , but he ís known to be lazy, and thus evaluates the project with a biased utility b (where b is his cost of effort to implement the project). Assume that you are risk-neutral, and that the plant manager implements the project when indifferent. (a) As a function of the bias b, should you decide yourself without the input of the plant manager, or should you delegate the decision to the plant manager? (b) Now assume that the bad outcome is actually a disaster, M = 8. How does your answer to part (a) change? Discuss.
7 Decentralization: You want to introduce lean manufacturing at your plant, but you are not sure whether it will work or not. You think that the outcome is equally likely to be great (incremental profit = 10), good ( = 5), ok ( = 1), or bad ( = M with M = 4). Your plant manager, who actually understand manufacturing knows , but he ís known to be lazy, and thus evaluates the project with a biased utility b (where b is his cost of effort to implement the project). Assume that you are risk-neutral, and that the plant manager implements the project when indifferent. (a) As a function of the bias b, should you decide yourself without the input of the plant manager, or should you delegate the decision to the plant manager? (b) Now assume that the bad outcome is actually a disaster, M = 8. How does your answer to part (a) change? Discuss.
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter1: Introduction And Goals Of The Firm
Section: Chapter Questions
Problem 1.9CE
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7
Decentralization: You want to introduce lean manufacturing at your plant, but you are not sure whether it will work or not. You think that the outcome is equally likely to be great (incremental profit = 10), good ( = 5), ok ( = 1), or bad ( = M with M = 4). Your plant manager, who actually understand manufacturing knows , but he ís known to be lazy, and thus evaluates the project with a biased utility b (where b is his cost of effort to implement the project). Assume that you are risk-neutral, and that the plant manager implements the project when indifferent. (a) As a function of the bias b, should you decide yourself without the input of the plant manager, or should you delegate the decision to the plant manager? (b) Now assume that the bad outcome is actually a disaster, M = 8. How does your answer to part (a) change? Discuss.
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