A company is planning a plant expansion. They can build a largeor small plant. The payoffs for the plant depend on the level ofconsumer demand for the company's products. For the large plant,the company expects $90 million in revenue if demand is high and$40 million if demand is low. For the small plant, the companyexpects $55 million in revenue if demand is high and $20 million ifdemand is low. The cost of the large plant is $5 million. The smallplant cost is $1 million.
The company believes that there is a 72% chance that demand fortheir products will be high and a 28% chance that it will below.
Construct a payoff and regret matrix based on the giveninformation.
What is the decision according to the EMV criterion? Be sure tosupport your answer.
Is your decision sensitive to the demand assumptions given forthis problem? You may answer generally, such as “very sensitive” or“not very sensitive” as long as you support your answer.
The company can pay a market research firm to survey consumerattitudes towards the company's products. The market research firmcost is $100,000. The market research firm has provided thefollowing cross tabulation showing recent results.
| High Demand | Low Demand | Total |
Favorable | .66 | .10 | .76 |
Unfavorable | .06 | .18 | .24 |
Total | .72 | .28 | 1 |
Construct a decision tree for this problem showing when thesurvey is conducted but the plant has not been built. Include allrelevant probabilities on the tree and all EMVs needed.
What is the expected value of the market research surveydata?
Should the market research firm be hired at a cost of $100,000?Be sure to support your answer.
