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retownes retownes
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6 years ago
Miles is considering buying a new pickup truck for his lawn service firm. The economy in town seems to be growing, and he is wondering whether he should opt for a subcompact, compact, or full-size pickup truck. The smaller truck would have better fuel economy, but would sacrifice capacity and some durability. A friend at the Bureau of Economic Research told him that there is a 30% chance of lower gas prices in his area this year, a 20% chance of higher gas prices, and a 50% chance that gas prices will stay roughly unchanged. Based on this information, Miles has developed a decision table that indicates the profit amount he would end up with after a year for each combination of truck and gas prices.

   States of Nature
Alternatives   Lower gas prices   Gas prices unchanged   Higher gas prices
Probability   .3   .5   .2
Subcompact   $16,000   $21,000   $23,000
Compact   $15,000   $20,000   $22,000
Full size   $18,000   $19,000   $6,000

Calculate the expected monetary value for each decision alternative. Which decision yields the highest EMV?
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Operations Management

Operations Management


Edition: 10th
Authors:
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AlmeyricAlmeyric
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retownes Author
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