QUESTIONS:
Assume that Mr. X has already
evaluated the potential profits associated with the various outcomes.
With a favorable market, 'X' thinks a large facility would result in a
net of N200,000 to the firm. If the market is unfavorable, it would result to a
net loss of N180,000. A small plant would result in a net profit of N100,000 in
a favorable market, but a net loss of N20,000 would occur if the market was
unfavorable. Finally, do nothing would result in a zero profit in either
market. What alternative decision should Mr. 'X' adopt if each state of nature
has a 0.50 chance?
SOLUTION:
The easiest way to present these
values is by constructing a decision table called a payoff table.
The decision table of Mr. 'X'
conditional values is shown below:
Decision making under Risk
ALTERNATIVES
|
FAVOURABLE
MARKET
|
UNFAVOURABLE
MARKET
|
Construct large plant
|
N200,000
|
-N180,000
|
Construct small plant
|
N100,000
|
-N20,000
|
Do-nothing
|
0
|
0
|
Probabilities
|
0.50
|
0.50
|
EMV (large Plant) = (0.50) (200,000)
+ (0.50) (-180,000)
=N100,000 - 90,000
=N10,000
EMV (Small Plant) = (0.50) (100,000)
+ (0.50) (-20,000)
= N50,000
=N40,000
EMV (Do-nothing) = (0.50) (0) +
(0.50) (0)
= 0
The largest expected value results
from the second alternative, that is, build a small facility. Thus, Mr. 'X'
should proceed with the project and build a small facility..
Little explanation:
0.50 x 200,000 = 100,000 that is how
we got that N100,000 above in the first workings
0.50 x -180,000 = -90,000 that is
how we finally got N100,000 - 90,000=10,000.
With that I hope you can work for
how I got 40,000?
The time for your exams is short and
this what I could lay my hands on. I wish you best of luck and I assure you
that the blog is developing a programming language that will enable it stock
loads of materials just like an e-Libraries in case of situations like this.
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