Question

I need help answering theses three parts with x's

Answer 1

(a) Recommendation: Manufacture the component part.

(b) Decision: Gorman should aim for a more accurate demand estimate, potentially worth up to $5,000.

(c) Probability: The chance of a favorable market research report is 0.35.

(d) Strategy: Conduct a test market; manufacture if favorable, purchase if unfavorable.

(e) EVPI: The expected value of market research information is $5,000.

(a) Decision: Manufacture the component part.

State of nature: Low demand, medium demand, or high demand.

Payoff: Manufacture: Low (-20), Medium (40), High (100); Purchase: Low (10), Medium (45), High (70).

Recommendation: Manufacture.

EVPI: Gorman should be willing to pay up to $5,000 for a perfect demand forecast, as the EVPI is the difference between the expected values of the optimal decision with and without perfect information.

(b) Gorman should attempt to obtain a better estimate of demand, as the additional information could be worth up to $5,000 for Gorman.

(c) The probability that the market research report will be favorable is:

`\[P(F) = P(F|s_1)P(s_1) + P(F|s_2)P(s_2) + P(F|s_3)P(s_3) = 0.10 * 0.25 + 0.40 * 0.35 + 0.60 * 0.4 = 0.35\]`

(d) Gorman's optimal decision strategy is:

- Conduct a test market.

- If the market is favorable, manufacture the component part.

- If the market is unfavorable, purchase the component part.

(e) The expected value of the market research information is:

EVPI = 50 - 45 = 5

Therefore, the expected value of the market research information is $5,000.