A company is considering expansion of its current facility to meet increasing demand. If demand is high in the future, the major expansion would result in an additional profit of $800,000, but if demand is low then there would be a loss of $500,000. If demand is high, the minor expansion will result in profits of $200,000, but if demand is low then there is a loss of $100,000. The company has an option of not expanding.
a. How would you advise the company? (Give a number of possible solutions under various
assumptions.)
b. If you found out that the probability of a high demand is .75, what would your advice
be then? What is the maximum you would be willing to pay for perfect information?