A Company Must Decide Whether or Not to Change Its

question 48

Essay

A company must decide whether or not to change its packaging to a more environmentally safe material. The impact of the decision on profits depends on which of the following three possible scenarios develops in the future.
Scenario 1:
The media do not focus heavily on concerns about packaging, and no new laws requiring changes in packaging are passed. Under this scenario, the company will make $35 million if they change their packaging now, but will make $75 million if they do not change their packaging now.
Scenario 2:
The media focus heavily on concerns about packaging, and no new laws requiring changes in packaging are passed. Under this scenario, the company will make $50 million if they change their packaging now, but will make $55 million if they do not change their packaging now.
Scenario 3:
The media focus heavily on concerns about packaging, and new laws requiring changes in packaging are passed. Under this scenario, the company will make $60 million if they change their packaging now, but will make only $15 million if they do not change their packaging now.
The prior probabilities of the three scenarios are 0.3, 0.5 and 0.2, respectively.
a. Develop a payoff table for this decision situation.
b. What decision will be made to maximise expected payoff?
c. What is the most the company should be willing to pay for a research study designed to reduce its uncertainty about media and legal developments concerning packaging?
d. Set up the opportunity loss table.
e. Which decision has the minimum expected opportunity loss?

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Definitions:

Antiaromatic

Antiaromaticity describes molecules that fail to comply with Huckel's rule, having conjugated pi systems with 4n π electrons that lead to destabilization.

Nonaromatic

Referring to organic compounds that do not have the aromatic stability associated with the delocalized pi electrons in a ring structure.

Aromatic Heterocycles

Rings of carbon atoms containing at least one non-carbon atom (heteroatom) like nitrogen, oxygen, or sulfur, that are stable due to aromaticity, important in many biological molecules and synthetic compounds.

Inflammatory Diseases

Disorders characterized by inflammation, which involves redness, swelling, pain, and sometimes loss of function, due to an immune response.