With reference to Example 9.1, suppose that the manufacturer has the option of hiring an infallible fore-caster for $ 15,000 to find out for certain whether there will be a recession. Based on the original 2 to 1 odds that there will be a recession, would it be worthwhile for the manufacturer to spend this $ 15,000?
Example 9.1
A manufacturer of leather goods must decide whether to expand his plant capacity now or wait at least another year. His advisors tell him that if he expands now and economic conditions remain good, there will be a profit of $ 164,000 during the next fiscal year; if he expands now and there is a recession, there will be a loss of $ 40,000; if he waits at least another year and economic conditions remain good, there will be a profit of $ 80,000; and if he waits at least another year and there is a recession, there will be a small profit of $ 8,000. What should the manufacturer decide to do if he wants to minimize the expected loss during the next fiscal year and he feels that the odds are 2 to 1 that there will be a recession?