The alternatives 1 and 2 in the following payoff table represent the two possible manufacturing strategies that the EKA manufacturing company can adopt. The level of demand affects the success of both strategies. The states of nature (Si, i = 1, 2, 3) represent the levels of demand for the company products. S1, S2 and S3 characterize high, medium and low demand with probabilities of .3, .6 and .1 respectively. The payoff values are in thousands of dollars.
$\begin{array} { l c c c } & { \text { States of nature } } \\& \mathrm { s } _ { 1 } & \mathrm {~s} _ { 2 } & \mathrm {~s} _ { 3 } \\\text { Alternative (strategy) } 1 & 10 & 80 & 70 \\\text { Alternative (strategy) } 2 & 60 & 120 & 50\end{array}$
-Find the expected monetary value for each of the alternatives and determine the best alternative (course of action) for the EKA manufacturing company using the expected monetary value criterion.

Question

The alternatives 1 and 2 in the following payoff table represent the two possible manufacturing strategies that the EKA manufacturing company can adopt. The level of demand affects the success of both strategies. The states of nature (Si, i = 1, 2, 3) represent the levels of demand for the company products. S1, S2 and S3 characterize high, medium and low demand with probabilities of .3, .6 and .1 respectively. The payoff values are in thousands of dollars.

\begin{array} { l c c c } & { \text { States of nature } } \\& \mathrm { s } _ { 1 } & \mathrm {~s} _ { 2 } & \mathrm {~s} _ { 3 } \\\text { Alternative (strategy) } 1 & 10 & 80 & 70 \\\text { Alternative (strategy) } 2 & 60 & 120 & 50\end{array}

-Find the expected monetary value for each of the alternatives and determine the best alternative (course of action) for the EKA manufacturing company using the expected monetary value criterion.

Quizplus · Accepted Answer

The expected monetary value (EMV) for each strategy is calculated by multiplying each payoff by the probability of its corresponding state of nature and summing the results. For strategy 1: EMV1 = (10 * 0.3) + (80 * 0.6) + (70 * 0.1) = 58,000. For strategy 2: EMV2 = (60 * 0.3) + (120 * 0.6) + (50 * 0.1) = 95,000. Strategy 2 has a higher EMV, so it is the better choice.

The Alternatives 1 and 2 in the Following Payoff Table