Alternatives 1 and 2 in the following payoff table represent the two possible manufacturing strategies that the EKA manufacturing company can adopt. The level of demand affects the success of both strategies. The states of nature (SI) represent the levels of demand for the company products. S1, S2, and S3 characterize high, medium, and low demand, respectively. The payoff values are in thousands of dollars.
The management believes that weather conditions significantly affect the level of demand. 48 monthly sales reports are randomly selected. These monthly sales reports show 15 months with high demand, 28 months with medium demand, and 5 months with low demand. 12 of the 15 months with high demand had favorable weather conditions. 14 of the 28 months with medium demand had favorable weather conditions. Only 1 of the 5 months with low demand had favorable weather conditions. Based on this information, the prior probabilities have been revised. If the weather conditions are favorable, P(S1) = .4286, P(S2) = .5357, and P(S3) = .0357; and if the weather conditions are poor, P(S1) = .1364, P(S2) = .6818, and P(S3) = .1818. It is also determined that the probability of favorable weather is .56 and the probability of poor weather is .44.
Carry out a preposterior analysis and, using the revised probabilities, determine (1) the expected monetary value when the weather conditions are favorable and (2) the expected monetary value when the weather conditions are poor.
Definitions:
Mutual Fund
An investment vehicle in which investors contribute to a fund that uses their pooled money to invest in stocks, bonds, and other financial assets. The fund owns the assets, while the investors own shares of the fund.
Investor
A person or organization that invests money expecting to earn financial profits.
Bond
A security reflecting a relatively long-term debt relationship between the issuer (borrower) and the buyer (lender).
Financial Market
A marketplace where buyers and sellers engage in the trade of assets such as stocks, bonds, currencies, and derivatives.
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