Use the following to answer the questions below.
A company that is introducing a new product has to choose between four different manufacturing methods,referred to as methods A,B,C and D.Depending on the demand for the product,they have forecast different levels of expenses for the year (values are in thousands).The company has identified three possible states of nature for economic growth,and named them High,Medium,and Low.
Table A.3
-Using the information in Table A.3,which alternative is best if further study revealed that the probability of high growth is 0.2,the probability of medium growth is 0.5,and the probability of low growth is 0.3?
A)A
B)B
C)C

Question

Use the following to answer the questions below.
A company that is introducing a new product has to choose between four different manufacturing methods,referred to as methods A,B,C and D.Depending on the demand for the product,they have forecast different levels of expenses for the year (values are in thousands).The company has identified three possible states of nature for economic growth,and named them High,Medium,and Low.
  Table A.3
-Using the information in Table A.3,which alternative is best if further study revealed that the probability of high growth is 0.2,the probability of medium growth is 0.5,and the probability of low growth is 0.3?
A)A 
B)B 
C)C

Quizplus · Accepted Answer

To find the best option, we need to calculate the expected cost for each method using the given probabilities of high, medium, and low growth.

Expected Cost of Method A = (0.2 x 375) + (0.5 x 350) + (0.3 x 450) = 375

Expected Cost of Method B = (0.2 x 420) + (0.5 x 360) + (0.3 x 480) = 384

Expected Cost of Method C = (0.2 x 340) + (0.5 x 340) + (0.3 x 340) = 340

Expected Cost of Method D = (0.2 x 450) + (0.5 x 400) + (0.3 x 500) = 430

Therefore, the option with the lowest expected cost is Method C, which is $340, making it the best choice.

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