Southland Corporation's decision to produce a new line of recreational products has resulted in the need to construct either a small plant or a large plant. The decision as to which size to select depends on the marketplace reaction to the new product line. To conduct an analysis, marketing managers have decided to view the possible long-run demand as low, medium, or high. The payoff table gives the projected profits in millions of dollars as follows:

a. Construct a decision tree for this problem and determine the best decisions using the maximax, maximin, and minimax-regret decision criteria.
b. Assume that the best estimate of the probability of low long-run demand is .20, of medium long-run demand is .15, and of high long-run demand is .65. What is the best decision using the EV criterion?

Transcribed Image Text:

Long-Run Demand Decision Low Small plant $150 Large plant 50 Medium High $200 200 $200 500