A company is planning a plant expansion. They can build a large or small plant. The payoffs for the plant depend on the level of consumer demand for the company's products. For the large plant, the company expects 90 million in revenue if demand is high and 40 million if demand is low. For the small plant, the company expects 55 million in revenue if demand is high and 20 million if demand is low. The cost of the large plant is 5 million. The small plant cost is 1 million.
The company believes that there is a 72% chance that demand for their products will be high and a 28% chance that it will be low.
The company can pay a market research firm to survey consumer attitudes towards the company's products. There is a 76% chance that the customers will like the products and a 24% chance that they won't. The company believes that if the survey is favorable (like) there is an 87% chance that demand will be high for the products. If the survey is unfavorable (won’t like) there is only a 25% chance that the demand will be high. The market research firm cost is $100,000.
Construct a payoff and regret matrix without the use of the market research firm.
What is the decision according to the max EMV criterion? Large plant or small? Support your answer with the EMVs.
Construct a decision tree for this problem. You may do one tree that shows all outcomes, with and without the market research firm. Or, you may do two separate trees. Be sure to show all payoffs and all EMVs.
Do you think the firm should be hired at the cost of $100,000? Support your answer?