A small parts manufacturer has just engineered a new product for the automotive industry. In order to produce the part the company can expand existing facilities, acquire a competitor, or subcontract production. The company believes the product will either experience high market demand or low market demand. The company believes the product will either experience high market demand or low market demand, with probabilities of 0.50 and 0.50, respectively.

The following payoff table describes the company’s decision situation (all numbers are in thousands).

Note that some numbers are negative. .............................................High Demand........Low Demand Expand Facilities........................1700.......................-1250 Acquire Competitor....................850.......................-475 Subcontract Production............275.......................30

1. What is the best decision based on optimistic approach? Expand Facilities Acquire Competitor Subcontract Production

2. What is the best decision based on pessimistic approach? Expand Facilities Acquire Competitor Subcontract Production

3. How much is the average payoff if the company expands facilities?

(a) How much is the average payoff if the company acquires competitor?

(b) How much is the average payoff if the company subcontracts production?

4. What is the best decision based on equal likelihood approach? Expand Facilities Acquire Competitor Subcontract Production

5. How much is the expected payoff if the company expands facilities?

(a) How much is the expected payoff if the company acquires competitor?

(b) How much is the expected payoff if the company subcontracts production?

6. What is the best decision based on expected value approach? Expand Facilities Acquire Competitor Subcontract Production

7. How much is the expected payoff if the company has full information about the demand?

8. Calculate the expected value of perfect information?

9. How much is the maximum regret of the company if they expand facilities?

(a) How much is the maximum regret of the company if they acquire competitor?

(b) How much is the maximum regret of the company if they subcontract production?

10. What is the best decision based on minimax regret approach? Expand Facilities Acquire Competitor Subcontract Production