Suppose that the company assigns prior probabilities of .3, .5, and .2 to low, moderate, and high demands, respectively.

a. Find the expected monetary value for each alternative (small, medium, and large).

b. What is the best alternative if we use the expected monetary value criterion?

The example involves a capacity-planning problem in which a company must choose to build a small, medium, or large production facility. The payoff obtained will depend on whether future demand is low, moderate, or high, and the payoffs are as given in the first table.

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Possible Future Demand Alternatives Small facility Moderate High $10 Low $10* $10 12 Medium facility 12 2 Large facility -4 16