State of Nature Decision Good Foreign Competitive Conditionspoor Foreign Competitive Conditions
State of Nature Decision Good Foreign Competitive Conditionspoor Foreign Competitive Conditions
Problem Statement
T. Bone Puckett, a corporate raider, has acquired a textile company and is contemplating the future of
one of its major plants, located in South Carolina. Three alternative decisions are being considered :
(1) expand the plant and produce lightweight, durable materials for possible sales to the military, a
market with little foreign competition; (2) maintain the status quo at the plant, continuing production of
textile goods that are subject to heavy foreign competition; or (3) sell the plant now. If one of the first
two alternatives is chosen , the plant will still be sold at the end of a year. The amount of profit that
could be earned by selling the plant in a year depends on foreign market conditions, including the
status of a trade embargo bill in Congress. The following payoff table describes this decision
situation:
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State of Nature
Decision Good Foreign Competitive ConditionsPoor Foreign Competitive Conditions
Expand $ 800,000 $ 500,000
Maintain status quo 1,300,000 150,000
Sell now 320,000 320,000
P (Pg) = .70
P (Ng) = .30
P (Pp) = .20
P (Np) = .80
Solution
Maximax:
Expand $ 800,000
Status 1,300,000 Maximum
quo
Sell 320,000
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Maximin:
Expand $ 500,000 Maximum
Status -150,000
quo
Sell 320,000
Decision: Expand.
Minimax
regret:
Expand $500,000 Minimum
Status quo 650,000
Sell 980,000
Decision: Expand.
Decision: Expand.
Equal
likelihood:
Expand $800,000(.50) + 500,000(.50) = $650,000
Status quo $1,300,000(.50) 150,000(.50) = $575,000
Sell $320,000(.50) + 320,000(.50) = $320,000
Decision: Expand.
Expected
value:
Expand $800,000(.70) + 500,000(.30) = $710,000
Status quo $1,300,000(.70) 150,000(.30) = $865,000
Sell $320,000(.70) + 320,000(.30) = $320,000
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expected value without perfect information= $1,300,000(.70) 150,000(.30)
= $865,000
EVPI= $1,060,000 865,000 = $195,000
Step 4. (part D): Develop a Decision Tree