An Automobile Manufacturer Must Make an Immediate Decision on the Car

question 19

Short Answer

An automobile manufacturer must make an immediate decision on the car size that should account for the majority of the firm's production two years from now. The firm perceives three possible states of nature at that time: S1, gasoline will be rationed; S2, gasoline will be readily available at close to current prices; and S3, gasoline will be readily available, but at much higher prices. The firm has determined the following profit payoff table (in $1,000s).
a.An economist at the auto company has advised the firm that the probabilities of the states of nature are P(S₁) = .2, P(S₂) = .5, and P(S₃) = .3. Find the expected monetary value for the three decisions.
b.Which decision should be chosen under the expected monetary value criterion?
c.Determine the expected value of perfect information.

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Definitions:

Return On Investment

A performance measure used to evaluate the efficiency or profitability of an investment, calculated as net profit divided by the cost of the investment.

Operating Assets

Assets that are used for the day-to-day operations of a business, including cash, inventory, and property, plant, and equipment.

Minimum Required Rate

The lowest acceptable rate of return on an investment demanded by an investor, considering risk factors.

Net Operating Income

The profit generated from a company's everyday operations, excluding income from investments and extraordinary items.