a. What is the EMV of each decision alternative? b. Which action should be selected? c. What is the expected value with perfect information?

Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
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2. A toy manufacturer has three different mechanisms that can be installed in a doll that it sells. The different
mechanisms have three different setup costs (overheads) and variable costs and, therefore, the profit from the
dolls is dependent on the volume of sales. The anticipated payoffs are as follows.
Light Demand
0.25
$325,000
$300,000
-$400,000
Heavy Demand
0.3
Probability
Wind-up action
Pneumatic action
Electrical action
Moderate Demand
0.45
$190,000
$420,000
S170,000
$400,000
$800,000
$240,000
a. What is the EMV of each decision alternative?
b. Which action should be selected?
c. What is the expected value with perfect information?
d. What is the expected value of perfect information?
e. What is the expected opportunity loss?
Transcribed Image Text:2. A toy manufacturer has three different mechanisms that can be installed in a doll that it sells. The different mechanisms have three different setup costs (overheads) and variable costs and, therefore, the profit from the dolls is dependent on the volume of sales. The anticipated payoffs are as follows. Light Demand 0.25 $325,000 $300,000 -$400,000 Heavy Demand 0.3 Probability Wind-up action Pneumatic action Electrical action Moderate Demand 0.45 $190,000 $420,000 S170,000 $400,000 $800,000 $240,000 a. What is the EMV of each decision alternative? b. Which action should be selected? c. What is the expected value with perfect information? d. What is the expected value of perfect information? e. What is the expected opportunity loss?
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