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Question
An operations manager's staff has compiled the information below for four manufacturing alternatives (E, F, G, and H) that vary by production technology and the capacity of the machinery. All choices enable the same level of total production and have the same lifetime. The four states of nature represent four levels of consumer acceptance of the firm's products. Values in the table are net present value of future profits in millions of dollars. Forecasts indicate that there is a 0.1 probability of acceptance level 1, 0.2 chance of acceptance level 2, 0.4 chance of acceptance level 3, and 0.3 change of acceptance level 4.
| States of Nature | ||||
| 1 | 2 | 3 | 4 | |
| Alternative E | 50 | 50 | 70 | 60 |
| Alternative F | 30 | 50 | 80 | 130 |
| Alternative G | 70 | 80 | 70 | 60 |
| Alternative H | -140 | -10 | 150 | 220 |
Using the criterion of expected monetary value, which production alternative should be chosen?
Answer
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