The owner of North American toy company is considering enlarging its production capacity to meet increasing future demand. The company can either expand its old plant or establish a new plant. The possible payoffs of these two actions are related to the increase in future demand and are shown in the following table.

(a) Write out the decision tree, and determine which action the owner should take if he uses the minimax regret approach.

(b) Assume the net worth of the firm at this stage is $500 thousands. The utility function of the owner is U(W) = 400 - 4000/W^1/2. Which action will generate the higher expected utility?

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Action Expansion New plant Probability Low 150 0 1/3 Demand (in thousands of dollars) Medium 250 250 1/3 High 250 500 1/3