New York is getting ready for a busy tourist season. They want to increase production or at least produce the same amount as last year, depending on the demand level for the coming season. NY estimates the probabilities for high, medium and low demands to be 0.5, 0.3, 0.2 respectively. These estimates are based on forcasts provided by the local tourist bureau. If they increase production, the profits corresponding to high, medium and low demands will be $800000, $400000 and $200000 respectively. If they do not increase production, the profits corresponding to the demands levels are 600000, 300000 and 200000 respectively/ Should NY increase production or maintain there existing levels?
Probabilities of high, medium, and low demands is 0.5, 0.3, and 0.2 respectively.
If the firm increase production then the profits corresponding to high, medium, and low demands will be $800000, $400000, and $200000 respectively.
Calculate Expected Profit in case the firm increases production -
Expected profit = [Profit with high demand * Probability of high demand] + [Profit with medium demand * Probability of medium demand] + [Profit with low demand * Probability of low demand]
Expected profit = [$800,000 * 0.5] + [$400,000 * 0.3] + [$200,000 * 0.2]
Expected profit = $400,000 + $120,000 + $40,000
Expected profit = $560,000
The Expected Profit in case the firm increases production is $560,000.
If the firm do not increase production then the profits corresponding to high, medium, and low demands will be $600000, $300000, and $200000 respectively.
Calculate Expected Profit in case the firm increases production -
Expected profit = [Profit with high demand * Probability of high demand] + [Profit with medium demand * Probability of medium demand] + [Profit with low demand * Probability of low demand]
Expected profit = [$600,000 * 0.5] + [$300,000 * 0.3] + [$200,000 * 0.2]
Expected profit = $300,000 + $90,000 + $40,000
Expected profit = $430,000
The Expected Profit in case the firm do not increases production is $430,000.
The expected profit is greater in case firm increases the production.
So,
The NY should increase production.
New York is getting ready for a busy tourist season. They want to increase production or...
New York is getting ready for a busy tourist season. They want to increase production or at least produce the same amount as last year, depending on the demand level for the coming season. NY estimates the probabilities for high, medium and low demands to be 0.5, 0.3, 0.2 respectively. These estimates are based on forcasts provided by the local tourist bureau. If they increase production, the profits corresponding to high, medium and low demands will be $800000, $400000 and...