Reference no: EM132434506

Problem: Steve is concerned with setting a correct production level. He can produce 500 units or 1100 units. Regardless of production, there is a 45% chance of high demand (2000 units) and a 35% chance of low demand (350 units) and a 20% chance of average demand (1000 units). Each unit costs $15 to produce and sells for $25. He can only sell the minimum of either demand or production (since he can't sell what he doesn't make and can't sell what isn't demanded).

A. Which production decision should Aaron make based on expected value of profit?

1- 1100

2- 500

B. Which production decision should Aaron make if he wishes to have an opportunity for the highest profit level he could possible achieve (maximax strategy)?

1. 1100

2. 500

C. Which production decision should Aaron make if he wants to make sure that he doesn't lose money?

1. 500

2. Both might lose money

3. Neither can lose money

D. What is the expected value of profit if you make a decision based on the expected value of profit? Indicate your answer, rounded to two decimal places (i.e. 111.01).