Assume that the probability of a booming demand state is 03

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Reference no: EM13390198

A decision-maker has to choose from among four mutually exclusive capacity options. Each option has a payoff associated with future demand states. The options and associated payoffs (in $millions) are as follows:

Options

Demand Standing Small Subcontract Large

States Pat Expansion Hybrid Expansion

Slow -5.0 1.0 -2.0 -6.0

Modest 0.0 3.0 4.0 -3.0

Booming 0.0 4.5 4.0 7.0

Suppose that the probability of a Booming demand state is 0.3. Further suppose that the Slow and Modest demand states are equally likely. What would be the expected value of the option that should be chosen?

Answers:

A. Not in excess of $1.75 million

B. In excess of $1.75 million but not in excess of $2.15 million

C. In excess of $2.15 million but not in excess of $2.65 million

D. In excess of $2.65 million but not in excess of $3.15 million

E. In excess of $3.15 million

Reference no: EM13390198

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