Reference no: EM1387822
Company GSW is considering whether to expand its production on a specific product. There is uncertainties in regarding to future market conditions for the product, which can be categorized into two states: favorable or unfavorable future market. Currently there are three alternatives for the GSW to choose from, to build a large plant, build a small plant or do nothing. The following table gives the corresponding payoff information in this decision making problem. For example, if GSW build a large plan, and if the future market turns out to be favorable for the product, then GSW can make $250,000 profits, but if the market turns out to be unfavorable, GSW will lose $200,000.
Alternative Favorable Market Unfavorable Market
Construct a large plant 250,000 -200,000
Construct a small plant 125,000 -25,000
Do nothing 0 0
a. If using Maximin criterion, what is the best alternative?
b. If the probability that the future market is favorable equals 0.5, what is the best strategy?
c. And what is the expected value of perfect information (EVPI)?
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