The electric company is in the process of building a new power plant. There is some uncertainty regarding the size of the plant to be built. If the community that the plant will service attracts a large number of industries, the demand for electricity will be high. If commercial establishments (offices and retail stores) are attracted, demand will be moderate. If neither industries nor commercial stores locate in the community, the electricity demand will be low. The company can build a small, medium, or large plant, but if the plant is too small, the company will incur extra costs. The total costs (in $millions) of all options are shown in the accompanying table.

The following probabilities are assigned to the electricity demand:

Demand..................................................... P(Demand)
Low.................................................................... .15
Moderate.......................................................... .55
High.................................................................... .30

a. Determine the act with the largest expected monetary value. (Caution: All the values in the table are costs.)
b. Draw up an opportunity loss table.
c. Calculate the expected opportunity loss for each decision, and determine the optimal decision.

Transcribed Image Text:

Size of Plant Electricity Demand Small Medium Large 300 320 220 350 Low Moderate 330 350 High 390 350 440