A manufacturer must decide whether to extend creditto a retailer who would like to open an account withthe firm. Past experience with new accounts indicatesthat 45% are high-risk customers, 35% are moderaterisk customers, and 20% are low-risk customers. Ifcredit is extended, the manufacturer can expect to lose$60,000 with a high-risk customer, make $50,000 witha moderate-risk customer, and make $100,000 with alow-risk customer. If the manufacturer decides not to

extend credit to a customer, the manufacturer neithermakes nor loses any money. Prior to making a creditextension decision, the manufacturer can obtain acredit rating report on the retailer at a cost of $2000.

The credit agency concedes that its rating procedure isnot completely reliable. In particular, the credit ratingprocedure will rate a low-risk customer as a moderaterisk customer with probability 0.10 and as a high-riskcustomer with probability 0.05. Similarly, the givenrating procedure will rate a moderate-risk customeras a low-risk customer with probability 0.06 and asa high-risk customer with probability 0.07. Finally,the rating procedure will rate a high-risk customeras a low-risk customer with probability 0.01 and as amoderate-risk customer with probability 0.05. Find thestrategy that maximizes the manufacturers expectednet earnings. (Note: If you set up the input section ofyour spreadsheet in the right way, you will be ableto perform all of the Bayes rule calculations with acouple of copyable formulas.). Also, make sure to compute and interpret EVSI for this decision problem. (hint:

Optimal net earnings = $31,655)