Answer Happy

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. Light $375,000 $135,000 State of Nature Moderate Alternatives Heavy Wind-up action $600,000 $975,000 Pneumatic action $660,000 $1,110,000 Electronic action -$150,000 $600,000 $1,170,000
Alternatives Wind-up action Pneumatic action Electronic action Light Regrets Moderate Heavy c) If the states of nature were equally likely (Laplace Criterion), which altemative 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) I 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)