# Question: With reference to Example 9 1 suppose that the manufacturer has

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?

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?

## Answer to relevant Questions

Each of the following is the payoff matrix (the payments Player A makes to Player B) for a zero- sum two- person game. Eliminate all dominated strategies and determine the optimum strategy for each player as well as the ...The following is the payoff matrix of a 2 × 2 zero-sum two- person game: (a) What randomized strategy should Player A use so as to minimize his maximum expected loss? (b) What randomized strategy should Player B use so as ...With reference to the illustration on page 267, show that even if the coin is flipped n times, there are only two admissible decision functions. Also, construct a table showing the values of the risk function corresponding ...Verify the results given on page 273 for the marginal density of X and the conditional density of given X = x. Show that the mean of a random sample of size n from an exponential population is a minimum variance unbiased estimator of the parameter θ.Post your question