Alternatives 1 and 2 in the Following Payoff Table Represent

question 56

Multiple Choice

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 (S_I) represent the levels of demand for the company products.S₁,S₂,and S₃ characterize high,medium,and low demand,with probabilities of .3,.6,and .1,respectively.The payoff values are in thousands of dollars. $\begin{array}{lccc} &&\underline{{\text { States of nature }}} \\& s_{1} & s_{2} & s_{3} \\\text { Alternative (strategy) } 1 & 110 & 80 & 70 \\\text { Alternative (strategy) } 2 & 60 & 120 & 50\end{array}$

Find the expected monetary value for each of the alternatives and determine the best alternative (course of action) for the EKA manufacturing company using the expected monetary value criterion.

• A)EMV₁ = $98,000,EMV₂ = $95,000,choose strategy 1
• B)EMV₁ = $88,000,EMV₂ = $95,000,choose strategy 2
• C)EMV₁ = $88,000,EMV₂ = $85,000,choose strategy 1
• D)EMV₁ = $66,667,EMV₂ = $76,667,choose strategy 2
• E)EMV₁ = $120,000,EMV₂ = $110,000,choose strategy 1

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Definitions:

Variable Costs

Costs that change in proportion to the level of output or activity in a business.

Snow-clearing

The process of removing snow from surfaces like roads and walkways to ensure safe passage and transportation.

Perfectly Competitive

A market structure characterized by a large number of small firms, identical products, and free entry and exit, leading to price-taking behavior.

Optimal Output Rule

The principle that profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost.