Jim Kelly, a corporate raider, has acquired a textile company and is contemplating the future of one of its major plants, located in Downtown Silver Spring, Maryland. Three alternatives decisions are being considered: (1) expand the plant and produce and produce lightweight, durable materials for possible sales to the military, a market with little foreign competition; (2) maintain the status quo at the plant, continuing production of textile goods that are subject to heavy foreign competition; or (3) sell the plant now. If one of the first two alternatives is chosen, the plant will still be sold at the end of a year. The amount of profit that could be earned by selling the plant in a year depends on foreign market conditions, including the status of a trade embargo bill in Congress. The following payoff table describes this decision.
State of Nature
Maintain status quo
Determine the best decision by using the following criteria:
Huwicz (α = 0.3)
Assume that it is now possible to estimate a probability of 0.70 that good foreign competitive conditions will exist and a probability of 0.30 that poor conditions will exist. Determine the best decision by using expected value and expected opportunity loss.
Compute the expected value of perfect information
Develop a decision tree, with expected values at the probability nodes.
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