1- A small parts manufacturer has just engineered a new productfor the automotive industry. In order to produce the part thecompany can expand existing facilities, acquire a competitor, orsubcontract production. The company believes the product willeither experience high market demand or low market demand. Thefollowing payoff table describes the company's decision situation.States of Nature Decision High Demand Low Demand Expand Facilities$2,000,000 -1,250,000 Acquire Competitor 750,000 -500,000Subcontract Production 250,000 25,000 The value of the Hurwiczdecision criterion for subcontract production when the coefficientof optimism is 0.30 is Select one
: A. $182,500 B. $250,000 C. $275,000 D. $92,500
2- A family business is considering making an investment in itsmanufacturing operation. Three decisions are under consideration:(1) a large investment; (2) a medium investment; and (3) a smallinvestment. The business believes that there are three possiblefuture outcomes for its product: (1) increasing demand; (2) stabledemand; and (3) decreasing demand. The business believes that theprobability for increasing, stable and decreasing product demandare 0.4, 0.5, and 0.1, respectively. The following payoff tabledescribes the decision situation.
States of Nature |
Decision | Increasing Demand (0.4) | Stable Demand (0.5) | Decreasing Demand (0.1) |
Large Investment | $1,000,000 | $400,000 | -$600,000 |
Medium Investment | 500,000 | 300,000 | -200,000 |
Small Investment | 250,000 | 125,000 | 25,000 |
If the expected value criterion is used then the best decisionwould be to
Select one:
A. make the medium investment
B. choose the stable demand
C. make the small investment
D. make the large investment