Determine the expected profit of each alternative

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Reference no: EM13233823

A small building contractor has recently experienced two successive years in which work opportunities exceeded the firm's capacity. The contractor must now make a decision on capacity for next year. Estimated profits under each of the two possible states of nature are as shown in the table below. Suppose after a certain amount of discussion, the contractor is able to subjectively assess the probabilities of low and high demand: P (low) = .30 and P (high) = .70.

Alternative Low High Do nothing $48* $61
Expand 23 81
Subcontract 26 71

a. Determine the expected profit of each alternative.

Do nothing: Expected Profit
Expand: Expected Profit
Subcontract: Expected Profit

b. Compute the expected value of perfect information

Reference no: EM13233823

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