QUESTION 6 4 marks Sowelo Corporation's decision to produce a new line of recreational products resulted...

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QUESTION 6 4 marks Sowelo Corporation's decision to produce a new line of recreational products resulted in the need to construct either a small plant or a large plant. The best selection of plant size depends on how the marketplace reacts to the new product line. To conduct an analysis, marketing management has decided to view the possible long-run demand as low, medium, or high. The following payoff table shows the projected profit in millions of kwacha: Long-Run Demand Plant Size Low Medium High Small Large 150 200 200 50 200 500 The probabilities for the states of nature are P(low)=0.65, P(medium) = 0.15, and P(High) = 0.20. (a) What is the optimal decision strategy if perfect information were available? 5 marks (b) Using the expected monitory value approach, what is the recommended decision without perfect information? What is its expected value? 6 marks (c) What is the maximum that you should pay for information to improve your decision? 4 marks (d) Define opportunity loss. What decision-making criteria are used with an opportunity loss table? 5 marks Additional information (3-1) EMV (alternative i) = X,P(X;) An equation that computes expected monetary value. (3-2) EVwPI = (best payoff in state of nature i) X (probability of state of nature i) An equation that computes the expected value with per- fect information. (3-3) EVPI = EVwPI - (best EMV) An equation that computes the expected value of perfect information. (3-4) EVSI = (EV with SI + cost) - (EV without SI) An equation that computes the expected value (EV) of sample information (SI). EVSI (3-5) Efficiency of sample information = 100% EVPI An equation that compares sample information to perfect information. QUESTION 6 4 marks Sowelo Corporation's decision to produce a new line of recreational products resulted in the need to construct either a small plant or a large plant. The best selection of plant size depends on how the marketplace reacts to the new product line. To conduct an analysis, marketing management has decided to view the possible long-run demand as low, medium, or high. The following payoff table shows the projected profit in millions of kwacha: Long-Run Demand Plant Size Low Medium High Small Large 150 200 200 50 200 500 The probabilities for the states of nature are P(low)=0.65, P(medium) = 0.15, and P(High) = 0.20. (a) What is the optimal decision strategy if perfect information were available? 5 marks (b) Using the expected monitory value approach, what is the recommended decision without perfect information? What is its expected value? 6 marks (c) What is the maximum that you should pay for information to improve your decision? 4 marks (d) Define opportunity loss. What decision-making criteria are used with an opportunity loss table? 5 marks Additional information (3-1) EMV (alternative i) = X,P(X;) An equation that computes expected monetary value. (3-2) EVwPI = (best payoff in state of nature i) X (probability of state of nature i) An equation that computes the expected value with per- fect information. (3-3) EVPI = EVwPI - (best EMV) An equation that computes the expected value of perfect information. (3-4) EVSI = (EV with SI + cost) - (EV without SI) An equation that computes the expected value (EV) of sample information (SI). EVSI (3-5) Efficiency of sample information = 100% EVPI An equation that compares sample information to perfect information.