A CEO faces a tough human resources decision. Because the company is currently operating in a budgetary crisis, the CEO will lay off 1,000 people, lay off 5,000 people, or lay off no one. One of the problems for the CEO is that she cannot foretell what the business climate will be like in the coming months. If the CEO knew there would be a rapid rise in demand for the company’s products, she might be inclined to hold off on layoffs and attempt to retain the workforce. If the business climate worsens, however, big layoffs seem to be the reasonable decision. Shown here are payoffs for each decision alternative under each state of the business climate. Included in the payoffs is the cost (loss of payoff) to the company when workers are laid off. The probability of each state occurring is given. Use the table and the information given to compute the EMV for each decision alternative and make a recommendation based on these findings. What is the most the CEO should be willing to pay for information about the occurrence of the various states of the business climate?

Transcribed Image Text:

Decision Alternative No Layoffs Lay Off 1,000 Lay Off 5,000 State of Business Climate Improved (0.10) 100 -100 -200 About the Worsened Same (0.40) (0.50) -300 100 300 -1,700 -700 600