Answer Happy

Question 3 (70 points) A toy manufacturer makes stuffed kittens and puppies which have relatively lifelike motions. There are three different mechanisms which can be installed in these "pets." These toys will sell for the same price regardless of the mechanism installed, but each mechanism has its own variable cost and setup cost. Profit, therefore, is dependent upon the choice of mechanism and upon the level of demand. Payoffs for each mechanism-demand combination appear in the table below. State of Nature Moderate Alternatives Wind-up action Pneumatic action Electronic action a) Assuming a Maximin strategy, which alternative would be chosen? (10 points) Light Heavy $375,000 $600,000 $975,000 $135,000 $660,000 $1,110,000 -$150,000 $600,000 $1,170,000 Alternatives Wind-up action Pneumatic action Electronic action b) Assuming a Minimax Regret strategy, which alternative would be chosen? (You can use the following regret (or opportunity loss) table to help you answer the question) (20 points) Light Regrets Moderate Heavy c) If the states of nature were equally likely (Laplace Criterion), which alternative should be chosen? (10 points) d) Assume that the manufacturer has in hand a forecast of demand that suggests a 0.3 probability of light demand, a 0.5 probability of moderate demand, and a probability of 0.2 of heavy demand. Using the criterion of expected monetary value, which production alternative should be chosen? (10 points) e) How much should the operations manager be willing to pay for accurate information (ie what is the Expected Value of Perfect Information, EVPI?)? (20 points)