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The J. R. Ryland Computer Company is considering a plant expansion to enable the company to begin production of a new computer product. The company’s president must determine whether to make the expansion a medium- or large-scale project. Demand for the new product is uncertain, which for planning purposes may be low demand, medium demand, or high demand. The probability estimates for demand are .20, .50, and .30, respectively. Letting x and y indicate the annual profit in thousands of dollars, the firm’s planners developed the following profit forecasts for the medium- and large-scale expansion projects. Medium-Scale Expansion Profit Large-Scale Expansion Profit x f ( x ) y f ( y ) Low 50 .20 0 .20 Demand Medium 150 .50 100 .50 High 200 .30 300 .30 a. Compute the expected value for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of maximizing the expected profit? b. Compute the variance for the profit associated with the two expansion alternatives. which decision is preferred for the objective of minimizing the risk or uncertainty?

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STATISTICS F/BUSINESS+ECONOMICS-TE...

13th Edition
Anderson
Publisher: CENGAGE L
ISBN: 9781305881884
BuyFind

STATISTICS F/BUSINESS+ECONOMICS-TE...

13th Edition
Anderson
Publisher: CENGAGE L
ISBN: 9781305881884

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Chapter
Section
Chapter 5.3, Problem 24E
Textbook Problem

The J. R. Ryland Computer Company is considering a plant expansion to enable the company to begin production of a new computer product. The company’s president must determine whether to make the expansion a medium- or large-scale project. Demand for the new product is uncertain, which for planning purposes may be low demand, medium demand, or high demand. The probability estimates for demand are .20, .50, and .30, respectively. Letting x and y indicate the annual profit in thousands of dollars, the firm’s planners developed the following profit forecasts for the medium- and large-scale expansion projects.

Medium-Scale

Expansion Profit

Large-Scale

Expansion Profit

x f (x) y f (y)
Low 50 .20 0 .20
Demand Medium 150 .50 100 .50
High 200 .30 300 .30
  1. a. Compute the expected value for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of maximizing the expected profit?
  2. b. Compute the variance for the profit associated with the two expansion alternatives. which decision is preferred for the objective of minimizing the risk or uncertainty?

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Chapter 5 Solutions

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