Question

The MS Company is going to introduce one of three new products: a hammer, a wrench or a plier. The market conditions (favorable, stable, or unfavorable) will determine the profit or loss the company realizes, as shown in the following payoff table: Market Conditions Favorable Stable Unfavorable Product 0.2 0.7 0.1 Hammer $120,000 $70,000 -$30,000 Wrench $60,000 $40,000 $20,000 Plier $35,000 $30,000 $30,000 What is the maximum expected value and the optimal decision according to the maximum expected value approach? [3pts]

Answers: 70 & Wrench 42 & Wrench 70 & Plier 70 & Hammer 31 & Plier

Answer 1

Total profit/loss with product= sum of (Probability of the market condition x Profit/loss)

1. Total profit/loss with Hammer = (0.2 x $120,000)+(0.7 x $70,000)+(0.1 x -$30,000)

= $70,000

2.Total profit/loss with Wrench = (0.2 x $60,000)+(0.7 x $40,000)+(0.1 x $20,000)

=$42,000

3.Total profit/loss with Plier= (0.2 x $35,000)+(0.7 x $30,000)+(0.1 x $30,000)

=$31,000

The maximum expected value=$70,000.

The optimal deecision to produce hammar.