Expected value of the market research information

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Reference no: EM13808155

The Gormon Manufacturing Company must decide whether to manufacture a component part at its Milan, Michigan plant or purchase the component part from a supplier. The resulting profit is dependent upon the demand for the product. The following payoff table shows the projected profit (in thousands of dollars).

State of Nature

Decision Alternative Low Demand - s1 Medium Demand - s2 High Demand - s3

Manufacture, d1 -20 40 100

Purchase, d2 10 45 70

Probabilities 0.35 0.35 0.30

a. Use a decision tree to recommend a decision.

b. Use EVPI to determine whether Gorman should attempt to obtain a better estimate of demand.

c. A test market study of the potential demand for the product is expected to report either a favorable (F) or unfavorable (U) condition. The relevant conditional probabilities are as follows:

P(F | s1) = 0.10 P(U | s1) = 0.90

P(F | s2) = 0.40 P(U | s2) = 0.60

P(F | s3) = 0.60 P(U | s3) = 0.40

What is the probability that the market research report will be favorable?

d. What is Gorman's optimal decision strategy?

e. What is the expected value of the market research information?

f. What is the efficiency of the information?

Reference no: EM13808155

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