Answer:
0.7
Explanation:
States of Nature
Alternatives Demand is High Demand is Low
Major Expansion $800, 000 - $500,000 -$500,000 -$500,000
Minor Expansion $200, 000 - $200,000 -$100, 000 - $200,000
Doing Nothing $0 $0
States of Nature
Alternatives Demand is High Demand is Low
Major Expansion $300,000 -$1,000,000
Minor Expansion $0 -$300,000
Doing Nothing $0 $0
Let D to be the probability of the high demand;
Then:
300,000 × D - 1,000,000 × (1 - D) = 0 × D - 300,000 × (1 - D)
300,000D - 1,000,000 - 1,000,000D = -300,000 + 300, 000D
-700,000 D -1,000,000 = -300,000 + 300,000 D
-1,000,000 + 300,000 = 700,000 D + 300,000 D
700,000 = 1,000, 000 D
D = 700,000/1,000,000
D = 0.7
∴ the probability of a high demand that the company will be indifferent between the two expansion alternatives = 0.7
