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:

Radical Behaviourism

A theory in psychology that emphasizes the external behaviors of people and their reactions on the environment, while dismissing thoughts and feelings as mere products of said behavior.

B F Skinner

An influential American psychologist known for his work in behaviorism and the development of the operant conditioning theory.

Genetic Inheritance

The process by which genetic information is passed on from parents to their offspring, determining specific traits or characteristics.

Prior Experiences

previously encountered events or situations that influence an individual's current thinking, behavior, or learning.