The Video Game Supply Company (VGS) is deciding whether to set next year's production at 2000, 2500, or 3000 games. Demand could be low, medium, or high. Using historical data, VGS estimates the probabilities as: .4 for low demand, .3 for medium demand, and .3 for high demand. The following profit payoff table (in $100s) has been developed.
Production Target
Demand
LowMedium
High
2000 games
1000
1200
1400
2500 games
800
1500
1300
3000 games
600
1700
1400
?
a.Determine the expected value of each alternative and indicate what should be the production target for next year.b.Determine the expected value with perfect information about the states of nature.c.Determine the expected value of perfect information.
What will be an ideal response?
?
| a. | 1180, 1160, 1170; Production target: 2000 games |
| b. | 1330 |
| c. | 150 |
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