Question

A toy manufacturer has three different mechanisms (‘alternatives") that can be installed in a doll that it sells. The different mechanisms have different setup costs (overheads) and variable costs and, therefore, the overall profit from the dolls is dependent on the alternative chosen. The probability of each demand "state of nature", as well as the anticipated payoff for each decision alternative, is as follows.
Light Demand Moderate Demand Heavy Demand
Probability 0.1 0.3 0.6
Wind – up action $325,000 $190,000 $170,000
Pneumatic action $300,000 $420,000 $400,000
Electrical action -$600,000 $240,000 $800,000
Required:
(A) Which one of the three alternatives has the maximum Expected Monetary Value (EMV) and what is its value? Your answer should include two things:
1) the name of the best alternative AND 2) its EMV dollar amount.

Answer 1

Answer:

The electrical action has the better expected monetary value with 492,000

Explanation:

We will multiply the expected outcome by their probability then, we add them to get the expected monetary value per option:

$\left[\begin{array}{ccccc} WIND-UP& Return& Probability& Weight\\ Light&325000&0.1&32500\\ Morerate&190000&0.3&57000\\ Heavy&170000&0.6&102000\\ Total&&1&191500\\\end{array}\right]$

$\left[\begin{array}{cccc} PNEUMATIC&Return&Probability&Weight\\ Light&300000&0.1&30000\\ Morerate&420000&0.3&126000\\ Heavy&400000&0.6&240000\\ Total&&1&396000\\\end{array}\right]$

$\left[\begin{array}{cccc} Electrical&Return&Probability&Weight\\ Light&-600000&0.1&-60000\\ Morerate&240000&0.3&72000\\ Heavy&800000&0.6&480000\\ Total&&1&492000\\\end{array}\right]$