busi 2013

QUESTION 6 Expected value Applied to Business Application (20 points) 23 minutes on ABCD Manufacturing Company must make a decision regarding the level of sales and dedication to a new product. There are 2 possible decisions to be evaluated. The potential profit from each decision alternative depends on the market acceptance which may be high, moderate or low. If market acceptance is high, each of the four decision alternatives, di and d2, will yield a profit of 420 and 380 thousand dollars respectively. If the demand turns out to be moderate, then the profits will be 190 and 130 thousand dollars respectively. If the demand turns out to be low, then the profits will be - 100 and -60 thousand dollars respectively, The prior probability estimates of demand to be high, moderate and low are shown below. The company first needs to decide whether to hire an expert to provide more accurate information regarding the future demand levels or not. . Graph the decision tree and state the decision strategy using the following probabilities: P(F) - 0.85 P(low F)- 0.15 P(moderate | F) -0.3 P(High F) - 0.55 P(low U) -0.45 P(High) -0.4 P(moderate U) -0.35 (moderate) -0.35 P(High(U) -0.2 P(Low) -0.25 P(U) = 0.15 Interpret the expected profit from the best decision alternative. QUESTION 6 Expected value Applied to Business Application (20 points) 23 minutes on ABCD Manufacturing Company must make a decision regarding the level of sales and dedication to a new product. There are 2 possible decisions to be evaluated. The potential profit from each decision alternative depends on the market acceptance which may be high, moderate or low. If market acceptance is high, each of the four decision alternatives, di and d2, will yield a profit of 420 and 380 thousand dollars respectively. If the demand turns out to be moderate, then the profits will be 190 and 130 thousand dollars respectively. If the demand turns out to be low, then the profits will be - 100 and -60 thousand dollars respectively, The prior probability estimates of demand to be high, moderate and low are shown below. The company first needs to decide whether to hire an expert to provide more accurate information regarding the future demand levels or not. . Graph the decision tree and state the decision strategy using the following probabilities: P(F) - 0.85 P(low F)- 0.15 P(moderate | F) -0.3 P(High F) - 0.55 P(low U) -0.45 P(High) -0.4 P(moderate U) -0.35 (moderate) -0.35 P(High(U) -0.2 P(Low) -0.25 P(U) = 0.15 Interpret the expected profit from the best decision alternative