# QUESTION 2 Decision Analysis Show all calculations to support your answers. Round all probability… 1 answer below »

QUESTION 2 Decision Analysis
Show all calculations to support your answers. Round all probability calculations to 2 decimal places.
John Carpenter runs a timber company. John is considering an expansion to his product line by manufacturing a new product, garden sheds. He would need to construct either a large new plant to manufacture the sheds, or a small plant. He decides that it is equally likely that the market for this product would be favourable or unfavourable. Given a favourable market he expects a profit of \$200,000 if he builds a large plant, or \$100,000 from a small plant.

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QUESTION 2 Decision Analysis
Show all calculations to support your answers. Round all probability calculations to 2 decimal places.
John Carpenter runs a timber company. John is considering an expansion to his product line by manufacturing a new product, garden sheds. He would need to construct either a large new plant to manufacture the sheds, or a small plant. He decides that it is equally likely that the market for this product would be favourable or unfavourable. Given a favourable market he expects a profit of \$200,000 if he builds a large plant, or \$100,000 from a small plant. An unfavourable market would lead to losses of \$180,000 or \$20,000 from a large or small plant respectively.
(a)  2 marksConstruct a payoff matrix for John’s problem. If John were to follow the EMV criterion, show calculations to indicate what should he do, and why?
(b)  2 marksWhat is the expected value of perfect information and explain the reason for such a calculation?
John has the option of conducting a market research survey for a cost of \$10,000. He has learned that of all new favourably marketed products, market surveys were positive 70% of the time but falsely predicted negative results 30% of the time. When there was actually an unfavourable market, however, 80% of surveys correctly predicted negative results while 20% of surveys incorrectly predicted positive results.
(c)  4 marksUsing the market research experience, calculate the revised probabilities of a favourable and an unfavourable market for John’s product given positive and negative survey predictions.
(d)  4 marksBased on these revised probabilities what should John do? Support your answer with EVSI and ENGSI calculations.
(e)  8 marksThe decision making literature mostly adopts a rational approach. However, Tversky and Kahneman (T&K) (Reading 3.1)  adopt a different approach, arguing that often people use other methods to make decisions, relying on heuristics.
What do they mean by the term heuristics? (2…

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