A audio manufacturer must decide whether to expand her plant now or wait at least another year.her advisor tells her that if she expands now and economic conditions remain good ,there will be a profit of $ 188000 during the next fiscal year; if he expands now and there is a recession ,there will be aloss (negative profit) of $80000;if he waits another year and economic conditions remain good,there will be a profit of $160000;and if she waits at least another year and there is a recession ,there will be a small loss
of $16000.The audio manufacturer feels that probabilities for economic conditions remaining good or there being a recession are 1/5 and 4/5 respectively.will expanding her plant capacity now maximize her expected profit? explain.
2006-08-02 02:30:55 · 9 answers · asked by karta s 2 in Science & Mathematics ➔ Mathematics
Let R = recession
Let r = good economic conditions
Let X = expansion
Let x = waiting to expand
P(RX) = 0.8; RX = -80000; P*RX = -64000
P(rX) = 0.2; rX = 188000; P*rX = 37600
P(Rx) = 0.8; Rx = -16000; P*Rx = -12800
P(rx) = 0.2; rx = 160000; P*rx = 32000
P*RX + P*rX = -26400
P*Rx + P*rx = 19200
It is best to wait to expand. The fact is, no matter what the manufacturer does her profit or less is dependent upon the economic conditions for the upcoming year. If she expands, she will earn a great reward if conditions remain good, but she will incur a great penalty if a recession takes place, as she expects it will. Multiplying the possible results by their respective probabilities we find that she will, on average, lose $26,400 next year if she expands. If she waits, however, then she will on average earn $19,200 next year.
2006-08-02 04:11:42 · answer #1 · answered by jimbob 6 · 6⤊ 0⤋
The person who wants to earn a profit means must be ready to take risk but actually the recession factor U have given shows that Very high risk so the return must be also very high but the return of $28000 ($188000-$160000) the actual income while take into account the present value factor will also may change according to the situation of inflation in the country so this is not very high so the good thing is to be safe enough to wait untill the 1yr end.
2006-08-02 03:32:22 · answer #2 · answered by Ramasubramanian 6 · 0⤊ 0⤋
Yes.
1/5 of (188000 - 80000) + 4/5 of (160000 - 16000) divide that with 2 x the 2 years of unbalance economic condition (x=mcx2/ no. of years) you'll get 1.21 Gigawatts.
2006-08-02 03:24:29 · answer #3 · answered by sulphur 3 · 0⤊ 0⤋
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2016-03-16 12:32:47 · answer #4 · answered by Gail 4 · 0⤊ 0⤋
OK this is pure game theory:
Make a table
all numbers in thousands
_______________Expand____Stay
Depression 1/5_____ -80____-16
Normal 4/5_________188____160
Expected Income____134______ 124.8
Thus He should expand, because his expected income is higher in that case.
2006-08-02 02:40:23 · answer #5 · answered by hq3 6 · 0⤊ 0⤋
He should wait for one year. Probability of reccesion is more. 4 times the improvement of economy.
2006-08-02 02:38:31 · answer #6 · answered by p20parimal 2 · 0⤊ 0⤋
if profit minus loss is $188000 - $80000 = $108000 profit after 1st redicted loss.
all in all, she should expand but then the predicted loss by her advisor can be wrong.
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2006-08-02 02:44:49 · answer #7 · answered by mercury of love 4 · 0⤊ 0⤋
I think that you need to figure that one on your own. What grade are you in. Go to Cosmeo. they'll help you.
2006-08-02 02:36:45 · answer #8 · answered by tennis_chick52292 1 · 0⤊ 0⤋
Too long, falling asleep, buy a calculator, do your own homework
2006-08-02 02:36:22 · answer #9 · answered by Anonymous · 0⤊ 0⤋