Refer to Problem 1. After examining the past history of sales for similar products, Girija was able to estimate the probabilities for the three demand scenarios as: P (low) = 0.3; P (medium) = 0.4; and P (high) = 0.3.

1. What is the EV for each alternative, and which one is the best?

2. If Girija hires an expert from the health-care industry to get additional information about the demand for ayurvedic products, how much is this information worth?

Data from problem 1

Ayush Pharmaceuticals, an Indian manufacturer of health-care products, is planning to expand its capacity to produce a new line of ayurvedic and herbal products. Nevertheless, the president of the company, Girija, is unsure about the nature of demand for this new product line. She is considering three possible capacity alternatives: Do nothing, expand the company€™s existing plant, or subcontract the production of the products. The estimated profits (in $) for the three alternatives under three different demand scenarios are provided in Table F.18. What decision would Girija select if the decision is made using:

Transcribed Image Text:

State of Nature Decision Alternative Do nothing Expand Subcontract Medium Demand Low Demand High Demand $ 40,000 $ 60,000 $80,000 $160,000 -$30,000 $100,000 $10,000 $70,000 $100,000