4.25The Gorman 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 Low DemandMedium DemandHigh DemandDecision Alternatives1s2s3Manufacture, d1-2040100Purchase, d2104570The state-of-nature probabilities are P(s1) = 0.35, P(s2) = 0.35, and P(s3) = 0.30.Use a decision tree to recommend a decision.Recommended decision: Use EVPI to determine whether Gorman should attempt to obtain a better estimate of demand.EVPI: $

As given in the question d1 and d2 are the decision alternatives and s1, s2 and s3 are the states of…

Answered: The Gorman Manufacturing Company must…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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4.25

The Gorman 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
	Low Demand	Medium Demand	High Demand
Decision Alternative	s₁	s₂	s₃
Manufacture, d₁	-20	40	100
Purchase, d₂	10	45	70

The state-of-nature probabilities are P(s₁) = 0.35, P(s₂) = 0.35, and P(s₃) = 0.30.

Use a decision tree to recommend a decision.

Recommended decision:
Use EVPI to determine whether Gorman should attempt to obtain a better estimate of demand.

EVPI: $

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