ABC Inc. must make a decision on its current capacity for next year. ABC is cons
ID: 442917 • Letter: A
Question
ABC Inc. must make a decision on its current capacity for next year. ABC is considering three alternatives. For each alternative, estimated profits (in $000s) based on next year's demand are shown in the table below. ABC Inc. estimates that the probability of high demand is 0.7 and the probability of low demand is 0.3.Do you notice that A2 dominates A3? Because A3 is worse than A2 under both demand scenarios, A3 will never be chosen and we can eliminate A3 from consideration. In other words, we only need to include A1 and A2 in the analysis. Suppose there is a clairvoyant who can predict the demand perfectly (the clairvoyant's prediction is always correct). You want to know how much this clairvoyant's prediction worth (i.e., expected value of perfect information; part c of the problem). In order to do so, you need to first calculate parts a and b. Calculate the expected value with perfect information. (Enter your answer in 000s. In other words, calculate the answer with the numbers in the table ectly.) Calculate the expected value without perfect information. (Enter your answer in 000s.) Calculate the expected value of perfect information. (Enter your answer in 000s.)Explanation / Answer
a. expected value with perfect information: with A1
A1= 0.7*192+0.3*97=134.4+29.1= 163.5
b. A2= 0.7* 175+0.3*125=122.5+37.5=160
c. A3= 0.7*147+0.3+120= 102.9+36= 138.9