Thompson Lumber Company (TLC) has re-analyzed its options with respect to the production of the new product: backyard storage sheds.

This analysis has now presented the new situation:

Alternatives: Four possible alternatives (large plant, medium plant, small plant, and do nothing)

States-of-Nature: Three possible market outcomes (great market; acceptable market; and bad market) There are also updated payoff scenarios as included in the following table: Alternative Great Market , Acceptable Market, Bad Market - Large Plant $275,000, $150,000, -$325,000

Medium Plant $170,000, $75,000, -100,000

Small Plant $130,000, $30,000, -$20,000

Do Nothing $0, $0, $0

a. Optimistic (Maximax) b. Pessimistic (Maximin) c. Criterion of Realism ( = 0.65)

Part 2: Decision Tree and Expected Monetary Value (EMV) (60 points) Please refer back to the TLC Example in Part 1.

Assume that the outcome probabilities for realizing the markets are as follows: Great market = 0.25 Acceptable market = 0.50 Bad market = 0.25 a.

Please sketch the decision tree

b. Calculate the Expected Monetary Value (EMV) for each alternative

c. Which alternative should you choose?