Question

Howard​ Weiss, Inc., is considering building a sensitive new radiation scanning device. His managers believe that there is a probability of 0.40 that the ATR Co. will come out with a competitive product. If Weiss adds an assembly line for the product and ATR Co. does not follow with a competitive​ product, Weiss's expected profit is $60,000​; if Weiss adds an assembly line and ATR follows​ suit, Weiss still expects $15,000 profit. If Weiss adds a new plant addition and ATR does not produce a competitive​ product, Weiss expects a profit of $600,000​; if ATR does compete for this​ market, Weiss expects a loss of $100,000.

a) Expected value for the Add Assembly Line Option

Answer 1

The expected value for the Add Assembly Line Option is calculated based on the probabilities of facing competition from ATR Co. and the associated profits, resulting in an expected value of $42,000.

Step-by-step explanation:

To calculate the expected value for Howard Weiss, Inc.'s Add Assembly Line Option, we need to use the probabilities of the events and their corresponding profits. Here is the step-by-step calculation:

Using these, the expected value (EV) is calculated as:

EV = (Probability of No Competition) * (Profit if No Competition) + (Probability of Competition) * (Profit if Competition)

EV = (0.60 * $60,000) + (0.40 * $15,000) = $36,000 + $6,000 = $42,000

Therefore, the expected value for the Add Assembly Line Option is $42,000.