Reference no: EM132796259

Company "Apple" is considering an opportunity to produce a conceptually new interactive device, the iTable, which could facilitate collaboration during business meetings, contactless information sharing, and other numerous applications within business, social, and game contexts. This new device could be produced in factories that either have: (i) a large production capacity or, (ii) a small production capacity. "Apple" top management needs to decide which of the options to choose from, also taking into account the option of not producing the "iTable" at all.

• If the company decides to use a large production capacity factory, it expects to get $200 million profit in the case of favorable economic conditions, and $180 million in losses in the case of unfavorable economic conditions. A factory with small production capacity and favorable economic conditions could bring $100 million profit to the company, while unfavorable economic conditions could lead to $20 million in losses.

Question (a) Using the information above, help the company to decide how it would minimize its regret. Show your work and provide your recommendation.

Question (b) Suppose that Apple has a fantastic option to buy PERFECT information regarding the future economic conditions. Such information will allow the company to make a decision under certainty. The company has been offered $65 million for this perfect information. Should it pay? Show your work

Question (c) Ottawa experienced a relatively high snowfall last winter. Consequently, student entrepreneur, Sarah Newfall is contemplating offering a snow-clearing service in Sandy Hill this coming winter. She is considering buying a new high capacity snow blower. If winter is 'heavy', then the snow blower is expected to bring in a profit of $700; if winter is 'moderate' then profits are $200; if winter is 'light' then she takes a loss of $900. The probabilities of 'heavy', 'moderate', and 'light' are 0.4, 0.3, and 0.3 respectively.
Alternatively, Sarah is considering borrowing a used low capacity snow blower good for smaller jobs. Profit estimates from the used snow blower are $350 if snow is 'heavy'; $100 if 'moderate'; and a loss of $150 if snow is 'light'. Sarah may also change her mind and abandon her snow-clearing service altogether.

• Sarah knows the local Weather Spotter who has access to, and is willing to run sophisticated weather tools to inform Sarah about winter weather. There is a 45% chance that the Weather Spotter will predict that this winter will be unseasonably cold and snowy. If so, the revised probabilities of 'heavy', 'moderate', or 'light' snowfall are: 0.7, 0.25, and 0.05 respectively. On the other hand, if the prediction is for a not-so-cold winter, then the revised probabilities are 0.15, 0.33, and 0.52 respectively.

Prepare/plot and solve the decision tree for this problem. Verbally communicate the decision strategy.

Question (d) As a freelancer, the Weather Spotter does not work for free. However, the Weather Spotter's fees for service are negotiable. Calculate the Expected Value of Sample Information to determine the maximum amount Sarah would be willing to pay to acquire the Weather Spotter's services.