A Firm Is Weighing Three Capacity Alternatives: Small, Medium, and Large

question 49

Essay

A firm is weighing three capacity alternatives: small, medium, and large job shop. Whatever capacity choice is made, the market for the firm's product can be "moderate" or "strong." The probability of moderate acceptance is estimated to be 40%; strong acceptance has a probability of 60%. The payoffs are as follows. Small job shop, moderate market = $24,000; Small job shop, strong market = $54,000. Medium job shop, moderate market = $20,000; medium job shop, strong market = $64,000. Large job shop, moderate market = -$2,000; large job shop, strong market = $96,000. Which capacity choice should the firm make?

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