Consider the Thompson Lumber EMV decision from Table 8.8. Suppose that the utility function for Thompson Lumber can be expressed as 1 – 1.2 – [(X + 120,000) / 30,000] for monetary value X. 

(a) Compute the expected utility of each decision for Thompson Lumber.

(b) Which choice maximizes expected utility?

Table 8.8

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Outcomes High Moderate Low EMV for Alternatives Demand Demand Demand Alternative Build large plant $200,000 $100,000 -$120,000 S200,000 x 0.3 + S100,000 x 0.5 +(-$120,000) x 0.2 = $86,000 Build small plant $ 90,000 $ 50,000 -$ 20,000 $90,000 x 0.3 + $50,000 x 0.5 +(-S20,000) x 0.2 $48,000 No plant $ 0 $ o $ 0 S0 x 0.3 + $0 x 0.5 + $0 x 0.2 Probabilities 0.3 0.5 0.2