Question 3. (10 points) ABC company now evaluate two alternative decisions on a plant located in New Brunswick. (1) Expand the plant and produce new product which need investment on R&D but will be more adaptive to the situation of market competition.

(2) Maintain the status quo at the plant, continuing production of product that are heavily subject to market condition; If the future market were favourable, the net profit of the first and second alternatives will be $800,000 and $1,100,000 respectively. In case of poor market competitive conditions, the net profit will be $500,000 for the first alternative, and a net loss of $150,000 (or negative profits, ($150,000)) for the second alternative. The payoffs for all combinations of decisions and states of the economy are shown in the following table:

Payoff(K$)	s1 favourable	s2 unfavourable
d1 expand the plant and produce new product	800	500
d2 maintain the status quo at the plant	1100	-150

1. (1.5 point) ABC company estimates that the probability of a favourable market is 0.7, calculate EMV and advice what decision with the company likely pursue considering these assessments of states of nature probabilities and EMV.
2. (1.5 point) What are the Expected Payoff with Perfect Information and the expected value of perfect information?

c. (5 points) is considering hiring a consulting firm to predict future market situations. The consulting firm use two indicators I₁ & I₂ for their forecast. From the previous experience, for good market condition, the consulting firm 90% successfully predicts good market condition(I₁). However, when there is poor market condition, the consulting firm can only predict 60% poor condition(I₂) successfully.

P(S|I)	s1	s2
I1	0.9	0.4
I2	0.1	0.6

Construct the decision tree for this problem (next page) and determine the expected payoff of sample (imperfect) information and the expected value of sample (imperfect) information.

d. (1 point) What is the efficiency of the sample information?

e. (1 point) If consulting firm charge a cost of $15,000 to for their services, is the value of the survey worth the cost? Explain in one very short sentence.