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QT 2 Assignment Part 1

Bob Jamis is considering establishing a waste treatment plant in Mississippi. He estimates the potential profits and losses for small, medium, and large facilities under low, medium, and high demand scenarios. A market research survey costing $50,000 could provide better data on demand probability. The marketing firm provided the conditional probabilities of different survey results given each demand scenario. Bob must decide whether to conduct the survey to inform his decision on which size plant, if any, to establish.

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155 views1 page

QT 2 Assignment Part 1

Bob Jamis is considering establishing a waste treatment plant in Mississippi. He estimates the potential profits and losses for small, medium, and large facilities under low, medium, and high demand scenarios. A market research survey costing $50,000 could provide better data on demand probability. The marketing firm provided the conditional probabilities of different survey results given each demand scenario. Bob must decide whether to conduct the survey to inform his decision on which size plant, if any, to establish.

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Harsh Tutorials
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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QT-II - Assignment-I-Part-I

Last Date for submission – 13-11-2019 before 5:00 pm.

Instruction: Submit handwritten document. This Assignment should be done individually.

1. The Jamis Corporation is involved with waste management. During the past 10 years it has become
one of the largest waste disposal companies in the Midwest, serving primarily Wisconsin, Illinois, and
Michigan. Bob Jamis, president of the company, is considering the possibility of establishing a waste
treatment plant in Mississippi. From past experience, Bob believes that a small plant in northern
Mississippi would yield a $500,000 profit regardless of the market for the facility. The success of a
medium-sized waste treatment plant would depend on the market. With a low demand for waste
treatment, Bob expects a $200,000 return. A medium demand would yield a $700,000 return in Bob’s
estimation, and a high demand would return $800,000. Although a large facility is much riskier, the
potential return is much greater. With a high demand for waste treatment in Mississippi, the large
facility should return a million dollars. With a medium demand, the large facility will return only
$400,000. Bob estimates that the large facility would be a big loser if there were a low demand for
waste treatment. He estimates that he would lose approximately $200,000 with a large treatment
facility if demand were indeed low. Looking at the economic conditions for the upper part of the state
of Mississippi and using his experience in the field, Bob estimates that the probability of a low demand
for treatment plants is 0.15. The probability for a medium-demand facility is approximately 0.40, and
the probability of a high demand for a waste treatment facility is 0.45.

Because of the large potential investment and the possibility of a loss, Bob has decided to hire a market
research team that is based in Jackson, Mississippi. The team will perform a survey to get a better
feeling for the probability of a low, medium, or high demand for a waste treatment facility. The cost
of the survey is $50,000. To help Bob determine whether to go ahead with the survey, the marketing
research firm has provided Bob with the following information :

P(survey results /possible outcomes)


Possible outcome Survey results
Low survey results Medium survey results High survey results
Low demand 0.7 0.2 0.1
Medium demand 0.4 0.5 0.1
High demand 0.1 0.3 0.6

Using appropriate method, determine which fund Ellie should invest in and its expected value.

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