A food manufacturer has to decide how many batches of a product to produce next week. If one batch is produced, the profit will be $15,000. If two batches are produced, but the demand is only sufficient for one batch, then a loss of $5,000 will occur. If two batches are produced and the demand is equal to two batches, then a profit of $20,000 will occur. The food manufacturer estimates the probabilities of these two outcomes as being 0.4 and 0.6 respectively. A separate forecasting tool, estimates demand will equal two batches. In the past, this tool has correctly predicted demand in 60% of weeks, irrespective of what the level of demand turned out to be. To maximise his expected profit, the manufacturer should: Select one: a. produce 1 batch b. produce 2 batches c. be indifferent between producing 1 or 2 batches d. seek more information, as it is not possible to compute the expected profits from this information
Question 8
A food manufacturer has to decide how many batches of a product to produce next week. If one batch is produced, the profit will be $15,000. If two batches are produced, but the demand is only sufficient for one batch, then a loss of $5,000 will occur. If two batches are produced and the demand is equal to two batches, then a profit of $20,000 will occur. The food manufacturer estimates the probabilities of these two outcomes as being 0.4 and 0.6 respectively. A separate
Select one:
a. produce 1 batch
b. produce 2 batches
c. be indifferent between producing 1 or 2 batches
d. seek more information, as it is not possible to compute the expected profits from this information -- Correct Answer
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Question 9
With reference to the decision described in Question 8, suppose that the food manufacturer had to decide whether it was worth paying for the forecast derived from the forecasting tool, before making his decision. The expected value of the 'imperfect' information obtained from the method would have been:
Select one:
a. $0
b. $2,700
c. $5,000 Incorrect answer
d. $7,800
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Question 10
With reference to the decision described in Question 8, suppose that the forecasting tool always gave a correct indication. The expected value of the 'perfect' information obtained from the method would have been:
Select one:
a. $0
b. $3,000
c. $6,000
d. $18,000
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