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5. The Brick Guys is a company specializing in manufacturing decorative bricks. The company discovers that its product's demand is somewhat correlated with the coonomy

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5. The Brick Guys is a company specializing in manufacturing decorative bricks. The company discovers that its product's demand is somewhat correlated with the coonomy conditions, that is, when the economy is good then the demand for the product increases. This opportunity was not taken in the year 2017 when the economy was extremely good and The Brick Guys do not want to loose out on such opportunities in the future. At the same time, it does not want to be left with large amounts of unsold decorative bricks at the end of the year as it may deteriorate in quality and has to be disposed. The company has received the following estimates about probable economy conditions and corresponding demand levels for 2018: Economy Probability Demand Good 25%45,000 pallets Average 45%38,000 pallets Poor 30%30,000 pallets Each pallet of decorated bricks sells for $100 and costs $40 to make. If bricks are unsold at the end of the year, it has to be disposed at $5 per pallet. The Brick Guys has decided to produce at one of the three levels of production to match forecast demand. It now has to decide which level of decorative bricks production to select. Required: (a) Construct a payoff table to show all the possible profit outcome. (8 marks) (b) Decide the level of production the company should choose, based on the following decision rules: (Justify your choice and show all necessary calculations) i. Maximin Ma LILIN iii. Expected value (6 marks) (c) Describe how risk can be reduced with diversification with an illustrated example

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