Question

DO NOT WRITE IN THIS BOOKLET BLEM1 A machine shop owner is attempting to decide whether to purchase a new paint booth, a spot welder a grinder. The return from each will be determined by whether the company succeeds in getting a vernment military contract. The profit or loss from each purchase and the probabilities associated with ach contract outcome are shown in the following payoff table. a. Compute the expected value for each decision and select which item the owner should buy. b. Develop the regret (opportunity loss) table and compute the expected opportunity loss for each decision. Determine the maximum amount the shop owner would be willing to pay to gain better information about the contract being awarded. c. Paint booth Spot welder Grinder Contract (40) No Contract (.60) S 20,000 $ -4,000 $10,000 $2,000 S6,000 $5,000 The owner of the shop is considering hiring a military consultant to ascertain whether the shop will get the government contract. The consultant is a former military officer who uses various personal contacts to find out such information. By talking to other shop owners who have hired the consultant, the owner has estimated a.70 probability that the consultant would present a favorable report given that the contract s awarded to the shop, and a.80 probability that the consultant would present an unfavorable report given hat the contract is not awarded. Based on the above information, what is the probability that the company will get a favorable report? If the company gets an unfavorable report, the owner will buy the grinder since it has the highest EMV ($5,200). If a favorable report is received, determine the EMV and which machine the owner should purchase. Would you hire this consultant? If so, what is the most the owner should pay for this consultant? Explain your answer based on statistical reasoning.

Answer 1

nSwer a Compule -the Expee full conhaut Drill Prus Calc Gaindem Go,000 니0,000 32 ,00D 6 0,000 0 cvelop the egnet able & comput he xpeutkd Drill Pres 6,000 ipoo Lalue

Full con haut alue 60,000-니DoOD= 20,000 Co,000 3 00 28,000 athe uo,0030,000 lo,000 Gainder to 0oo 28,000 12 ,ooo No Conhast Dril 6,0o16,000 1o,0o0 021000 athe 26,000-dy,000 epet table Fulf No Conae Io ooo (maxt Laftie lo, DDD Gaindu 8,ooo ,00 o

Pay o 6,000 0.6 "DYǐl Co.ooo xo.6 + 16,000 Xo-y "Pred :エ Lathe - 40,000 X о.6 +良4,00oxo.y 33,6b00 Gainder 32,000 x D-6 + 26,000 ХОУ = 460o 42,400