Question

At a decision point in a decision tree, which machine would you select when trying to maximize payoff when the anticipated benefit of selecting machine A is $45,000 with a probability of 90%; the expected benefit of selecting machine B is $80,000 with a probability of 50% and the expected benefit of selecting machine C is $60,000 with a probability of 75%

Answer 1

Machine to select for maximum payoff:

Expected Outcomes:

A = $45,000 x 90% = $40,500

B = $80,000 x 50% = $40,000

C = $60,000 x 75 % = $45,000

C has the highest expected outcome of $45,000

Choose C.

Step-by-step explanation:

Anticipated benefits:

A = $45,000 with pr = 90%

B = $80,000 with pr = 50%

C = $60,000 with pr = 75%

The expected benefit or outcome Machine A is obtained by multiplying the anticipated benefit with its probability of occurrence. This gives a value that has been weighed. The decision rule is to choose the machine with the highest outcome.