: Do not include anything other than numbers in your responses. For example, do not include comma or dollar sign in your numbers. As a rule of thumb, keep 2 decimal places for larger numbers and 3 decimal places for smaller numbers less than 1. A small parts manufacturer has just engineered a new product for the automotive industry. In order to produce the part the company can expand existing facilities, acquire a competitor, or subcontract production. The company believes the product will either experience high market demand or low market demand. The company believes the product will either experience high market demand or low market demand, with probabilities of 0.65 and 0.35, respectively.
The following payoff table describes the company’s decision situation (all numbers are in thousands). Note that some numbers are negative.
High Demand ~ Low Demand
Expand 2000 ~ -1150
Acquire 900 ~ -425
Subcontract 300 ~ 40
• Fill in the following blanks. Keep two decimal places for your calculations.
Expected Value (for expected value approach)
Expand ~
Acquire ~
Subcontract ~
• What is the best decision based on the expected value approach?
(Expand/Acquire/Subcontract)
• How much is the expected payoff if the company has full information about the demand?
• Calculate the expected value of perfect information?
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