The Following Payoff Table Provides Profits Based on Various Possible

question 102

Essay

The following payoff table provides profits based on various possible decision alternatives and various levels of demand. The probability of a low demand is 0.4,while the probability of a medium and high demand is each 0.3.
(a)What decision would an optimist make?
(b)What decision would a pessimist make?
(c)What is the highest possible expected monetary value?
(d)Calculate the expected value of perfect information for this situation.

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Definitions:

Opportunity Costs

The cost of an alternative that must be foregone to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action.

Make Total Cost

An approach to calculate the comprehensive cost of manufacturing a product, including raw materials, labor, and overheads.

Buy Total Cost

The total expense incurred to purchase an item or service, including the purchase price and any additional fees or expenses.

Variable Expenses

Costs that vary in total in direct proportion to changes in business activity levels or volumes, such as sales commissions or raw material costs.