Howard Weiss, Inc., is considering building a sensitive new radiation scanning device. His managers believe that there is aprobability of
0.45
that the ATR Co. will come out with a competitive product. If Weiss adds an assembly line for the product and ATR Co. does not follow with a competitive product, Weiss’s expected profit is
$60,000;
if Weiss adds an assembly line and ATR follows suit, Weiss still expects
$10,000
profit. If Weiss adds a new plant addition and ATR does not produce a competitive product, Weiss expects a profit of
$600,000;
if ATR does compete for this market, Weiss expects a loss of
$80,000.
Part 2a) Expected value for the
Add Assembly Line
option =
$enter your response here
(enter your answer as a whole number).
To calculate the expected value for the “Add Assembly Line” option, we need to consider the various outcomes and their associated probabilities. Howard Weiss, Inc. is contemplating this decision based on the likelihood of ATR Co. entering the market with a competitive product. Let’s break down the potential outcomes:
1. If ATR Co. does NOT come out with a competitive product:
– Expected Profit: $60,000 (as stated in the problem)
– Probability of this happening: 1 – 0.45 = 0.55 (complement of the probability of ATR entering the market)
2. If ATR Co. DOES come out with a competitive product:
– Expected Profit: $10,000 (as stated in the problem)
– Probability of this happening: 0.45 (probability of ATR entering the market)
Now, let’s calculate the expected value for the “Add Assembly Line” option:
Expected Value = (Probability of Outcome 1 * Expected Profit from Outcome 1) + (Probability of Outcome 2 * Expected Profit from Outcome 2)
Expected Value = (0.55 * $60,000) + (0.45 * $10,000)
Expected Value = $33,000 + $4,500
Expected Value = $37,500
So, the expected value for the “Add Assembly Line” option is $37,500.
In summary, by adding an assembly line, Howard Weiss, Inc. can expect an average profit of $37,500, taking into account the probabilities and potential outcomes associated with ATR Co.’s competitive product entry. This analysis helps Weiss make an informed decision about whether to proceed with this option.
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