Chapter 20, Problem 15PS

In Problem 20.3, you developed a payoff table for building a small factory or a large factory for manufacturing designer jeans. Given the results of that problem, suppose that the probabilities of the demand are as follows:

a. Determine the optimal action based on the maximax criterion.

b. Determine the optimal action based on the maximin criterion.

c. Compute the expected monetary value (EMV) for building a small factory and building a large factory.

d. Compute the expected opportunity loss (EOL) for building a small factory and building a large factory.

e. Explain the meaning of the expected value of perfect information (EVPl) in this problem.

f. Based on the results of (c) or (d), would you choose to build a small factory or a large factory? Why?

g. Compute the coefficient of variation for building a small factory and building a large factory.

h. Compute the return-to-risk ratio (RTRR) for building a small factory and building a large factory.

i. Based on (g) and (h), would you choose to build a small factory or a large factory? Why?

j. Compare the results of (f) and (i) and explain any differences.

k. Suppose that the probabilities of demand are 0.4, 0.2, 0.2, and 0.2, respectively. Repeat (c) through (j) with these probabilities and compare the results with those originally computed in (c)-(j).