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Decision Under Risk

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Please help with problems below.

Profit (in $millions) if Demand is
Output Level Weak Strong
1 million units 60 175
1.5 million units 50 200
2.0 million units â?"50 400

2. Now suppose that management believes the probability of weak demand in 2012 is25% and the probability of strong demand is 75%. Compute the expected profit,variance, standard deviation, and coefficient of variation for each level of output:

Output
1 million units ________ ________ ________ ________
1.5 million units ________ ________ ________ ________
2.0 million units ________ ________ ________ ________

3. Based on the expected value rule, Star Products should produce ________ units in
2012.

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Solution Summary

Decision under risk is examined. The expected profit, variance, standard deviation and coefficients of variation are examined.

Solution Preview

1 mil:

expected profit = 0.25 X 60 + 0.75 X 175 = 146.25

variance = 0.25 X (60-146.25)^2 + 0.75 X (175-146.25)^2 = 2479.69

std dev = sqrt 2479.69= ...

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