A decision-maker is faced with the selection of new manufacturing technologies. The three choices are Aiternatves A, B, and C. Possible consumer demand levels are the states of nature: Scenarios 1, 2, and 3. Probabilities of these scenarios are in the table below. This table also cotains the matrix of conditional profits. Alternatives Alternative A Scenario 1 $25,000,000 S500,000 S2,000,000 Scenario 2 $1,000,000 S1,500,000 Alternative C Probability $1,800,000 $500,000 0.5 $1,000,000 - S500,000 0.4 Find the EMV of each decision alternative (enfer your responses as whole numbers). Alternatives Alternative A Alternative B Alternative C EMV 1400000 1350000 S50000 Using EMV as the criterion, the best decision is How good is EMV as a criterion for this problem? O A. EMV is most reliable when the decision is repeated many times. O B. EMV is most reliable when the scenarios are not mutually exclusive. O C. EMV is not a reliable method. Which decision alternative would you select? OA. O B. ° C. Alternative C can be chosen because it has medium values for each scenario. Alternative B can be chosen because it has EMV only slightly smaller than Altemative A and it looks less risky. one of the alternatives except A is a good choice
Answer
EMV for A = = 0.1*25000000 - 0.5*1000000 - 0.4*1500000 = 1400000
$
Using EMV the best decision is Alternative A.
EMV is most reliable when the decision is repeated many times.
Correct option
Alternative B can be chosen because it has EMV only slighly
smaller than Alternative A and it looks less risky.
