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 demandmedium demnadhigh demandDecision alternatives1s2s3manufacture d1-2040100purchase d2104570The state-of-nature probabilities are P(s1) = 0.35, P(s2) = 0.35, and P(s3) = 0.30.a. Use expected value to recommend a decision.b. Use EVPI to determine whether Gorman should attempt to obtain a better estimate of demand.

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ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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 demnad	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.

a. Use expected value to recommend a decision.

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

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