Calculate the expected opportunity loss for each decision

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Question - A company is investigating the possibility of producing and marketing backyard storage sheds. Undertaking this project would require the construction of either a large or a small manufacturing plant. The market for the product produced - storage sheds - could be either favourable or unfavourable. The table below shows the conditional values for the company's various alternatives and state of nature.

Decision

Favourable market

Unfavourable market

Construct Large plant

Rs 450,000

-Rs 100,000

Construct small plant

Rs 100,000

-Rs 5000

Do nothing

Rs 0

Rs 0

Suppose the operations manager believes that the probability of a favourable market is exactly the same as that of an unfavourable market, that is, each state of nature has a 50% chance of occurrence. Calculate the expected opportunity loss for each decision, and hence determine the optimal decision.

Reference no: EM133079194

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