A manufacturing company is considering expanding its production capacity to meet a growing demand for its product line of air fresheners. The alternatives are to build a new plant, expand the old plant, or do nothing. The marketing department estimates a 35 percent probability (prior probability) of a market upturn, a 40 percent probability of a stable market, and a 25 percent probability of a market downturn. Georgia Swain, the firm’s capital appropriations analyst, estimates the following annual returns for these alternatives: Market Upturn Stable Market Market Downturn Build new plant $690,000 -$130,000 -$150,000 Expand old plant $490,000 -$45,000 -$65,000 Do nothing $50,000 0 -$20,000 a. Use the maxi-max and max-min criterion to determine which alternative should be chosen b. Use a decision tree analysis to analyze these decision alternatives. c. Which option should be chosen in this case? d. Later, the company discovered that current prior probabilities might be inaccurate, so it hired a famous economic analyst, James, to come up with a different prior probabilities for each market status. Two months later, James came up with different probabilities for current economy. He estimates a 10 percent probability of a market upturn, a 25 percent probability of a stable market, and a 65 percent probability of a market downturn. Based on the new probabilities, which option should a firm choose?
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