A Toy Manufacturer Has Three Different Mechanisms That Can Be

question 38

Essay

A toy manufacturer has three different mechanisms that can be installed in a doll that it sells. The different mechanisms have three different setup costs (overheads) and variable costs and, therefore, the profit from the dolls is dependent on the volume of sales. The anticipated payoffs are as follows.
$$\begin{array} { | l | c | c | c | } \hline & \text { Light Demand } & \begin{array} { c } \text { Moderate } \\\text { Demand }\end{array} & \text { Heavy Demand } \\\hline \text { Probability } & 0.25 & 0.45 & 0.3 \\\hline \text { Wind-up action } & \$ 325,000 & \$ 190,000 & \$ 170,000 \\\hline \text { Pneumatic action } & \$ 300,000 & \$ 420,000 & \$ 400,000 \\\hline \text { Electrical action } & - \$ 400,000 & \$ 240,000 & \$ 800,000 \\\hline\end{array}$$
a. What is the EMV of each decision alternative?
b. Which action should be selected?
c. What is the expected value with perfect information?
d. What is the expected value of perfect information?

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Definitions:

Crowding-Out

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Investment-Accelerator Effects

The phenomenon where an increase in national income or output leads to a disproportionately larger increase in investment expenditure.

Money Supply

The entire financial resource sum in an economy at a particular time.

Owning Stocks

Owning stocks means having equity or ownership in a corporation, granting the shareholder a claim on the company's assets and earnings, often accompanied by voting rights on corporate matters.