A multinational toy manufacturer has three different chip circuits that can be installed in a doll that it sells. The different chips each have three different setup costs (overheads) and variable costs, and therefore, the profit from the dolls is dependent on the volume of sales. The marketing department has projected that there is a 25% probability of a poor market and 30% for an excellent market. The anticipated payoffs are as indicated in the table below.
Poor Market Good Market Excellent Market
Probability 0.25 ?? 0.3
Chip A $278,300 $191,500 $186,000
Chip B $305,000 $380,000 $426,000
Chip C -$400,000 $240,000 $800,000
What is the probability for a good market? How do we know that?
What is the EMV of each decision alternative? Show your calculations.
Which alternative chip should be selected? Provide reasons for your answer.
What is the expected value with perfect information?
What is the expected value of perfect information?
What it the importance of the expected value of perfect information to the toy manufacturer? How shall they apply this information?