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Probability of preference level

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Suppose that a company wants to find the impact of upgrading its production technology so that their profit increases. There are two levels of upgrade for the production technology. If the company maintains its current production technology, it has an annual cost of 0.6 million dollars for maintenance. If the company upgrades its systems to level 1, it has a cost of 1.2 million dollars, but it increases the total profit of the company by 2.5 million dollars per year. If the system is upgraded to level 2, it has a cost of 1.9 million dollars, but it the total profit increases by 2.9 million dollars per year. The customers are usually willing to pay more for the products produced by new technologies. Therefore, they will pay more for it, and the products with higher production technology. The customer preferences for new technology is categorized into three levels. In level 1, they do not pay more for the higher technology. In level two of their preference, the company's profit increases by 0.6 and 0.9 million dollars per year for technologies level 1 and 2, respectively. In level 3 preference, the company's profit increases by 0.9 and 1.1 million dollars per year for technologies level 1 and 2, respectively.

a) Show the payoff table for this decision problem.

b) Show the decision tree for this decision problem.

c) Suppose that probability of preference level 1, 2, and 3 is 0.2, 0.6, and 0.2, respectively. Please select the best alternative.

Reference no: EM132988529

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