Some companies use production learning curves to set pricing strategies. They price their product lower than the initial cost of making the product; after some period of time, the learning curve takes effect and the product can be produced for less than its selling price. In this way, the company can penetrate new markets with aggressive pricing strategies and still make a long-term profit. A company is considering using the learning curve to set its price on a new product. There is some uncertainty as to how soon, if at all, the production operation will learn to make the product more quickly and efficiently. If the learning curve does not drop enough or the initial price is too low, the company will be operating at a loss on this product. If the product is priced too high, the sales volume might be too low to justify production. Shown here is a decision table that contains as its states of nature several possible learning-curve scenarios. The decision alternatives are three different pricing strategies.a. Use this table and the Hurwicz criterion to make a decision about the pricing strategies with each given value of α.b. Compare and discuss the decision choices in part (a).

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Price Low Decision Alternative Medium Price Price High i. α = 0.10 ii. α = 0.50 iii. α = 0.80 State of Nature No Slow Learning Learning -$700 -$300 $100 -$400 -$100 $125 Fast Learning $1,200 $550 $150