Bilini Farms is a small, family-operated business that sells produce to local markets. The owners are currently
Question:
Bilini Farms is a small, family-operated business that sells produce to local markets. The owners are currently trying to decide whether they should expand, keep the same size farm or reduce the size of the farm. They assessed the demand levels for their produce in the local market and probabilities associated with each demand level: high (probability 0.32), medium (probability 0.46), or low (probability 0.22). The payoffs they expect for each demand/acreage scenario are listed below. Acreage Demand Expand Same Size Contract High $120,000 $48,000 $28,000 Medium $49,000 $41,000 $28,000 Low $-13,700 $21,000 $28,000 a. What is perfect information about the demand worth under these circumstances? Please show your calculations.
b. The farm has hired a consultant to forecast the demand. The consultant has predicted low demand. The accuracy of his predictions are as follows: P(PH \ H) = 0.69 P(PH\ M) = 0.20 P(PH \ L) = 0.11 P(PM \ H) = 0.18 P(PM \ M) = 0.68 P(PM \ L) = 0.19 P(PL \ H) = 0.13 P(PL \ M) = 0.12 P(PL \ L) = 0.70 Where: H = high demand PH = predict high demand M = medium demand PM = predict medium demand L = low demand PL = predict low demand Based on the accuracy of the prediction, calculate the revised probability for each state of nature (to 3 decimal places) given that the consultant forecast low demand.
Managerial Accounting A Focus on Ethical Decision Making
ISBN: 978-0324663853
5th edition
Authors: Steve Jackson, Roby Sawyers, Greg Jenkins