Question

strategy 3 is $0. Thus, using the eually cyp row average for strategy 2, which maximizes the row averages. -3 fonica Britt has enjoyed sailing small boats since she was 7 years old, when her mother started sail- er. Today, Monica is considering the possibility of starting a company to produce small sail- for the recreational market. Unlike other mass-produced sailboats, however, these boats will be boats made specifically for children between the ages of 10 and 15. The boats will be of the highest quality and extremely stable, and the sail size will be reduced to prevent problems of capsizing. Her basic decision is whether to build a large manufacturing facility, a small manufaoturing facil ity, or no facility at all. With a favorable market, Monica can expect to make $90,000 from the large facility or $60,000 from the smaller facility. If the market is unfavorable, however, Monica estimates that she would lose $30,000 with a large facility, and she would lose only $20,000 with the small facility. Because of the expense involved in developing the initial molds and acquiring the necessary equipment to produce fiberglass sailboats for young children, Monica has decided to conduct a pilot study to make sure that the market for the sailboats will be adequate. She estimates that the pilot study will cost her $10,000. Furthermore, the pilot study can be either favorable or unfavorable. Monica estimates that the probability of a favorable market given a favorable pilot study is 0.8. The probabil- ity of an unfavorable market given an unfavorable pilot study result is estimated to be 0.9. Monica feels that there is a 0.65 chance that the pilot study will be favorable. Of course, Monica could bypass the pilot study and simply make the decision as to whether to build a large plant, small plant, or no facility at all. Without doing any testing in a pilot study, she estimates that the probability of a favor- able market is 0.6. What do you recommend? Compute the EVSI Solution Before Monica starts to solve this problem, she should develop a decision tree that shows all alterna- tives, states of nature, probability values, and economic consequences. This decision tree is shown in Figure 3.14.

Answer 1