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Decision Making

Remox Corporation is a British firm that sells high-fashion sportswear in the United States. Congress is currently considering the imposition of a protective tariff on imported textiles. Remox is considering the possibility of moving 50 percent of its production to the United States to avoid the tariff. This would be accomplished by opening a plant in the United States. The following table lists the profit outcomes under various scenarios.
Profits in 2008
No tariff Tariff
Option A Produce all output in Britain $1,200,000 $800,000
Option B Produce 50% in the United States $ 875,000 $1,000,000

Remox hires a consulting firm to assess the probability that a tariff on imported textiles will in fact pass a congressional vote and not be vetoed by the president. The consultants forecast the following probabilities:
Probability
Tariff will pass 30%
Tariff will fail 70%

a. Compute the expected profits for both options
b. Based on the expected profit only, which option should Remox use?
c. Compute the probabilities that would make Remox indifferent between options A and B using that rule
d. Compute the standard deviations for options A and B facing Remox Corporation
e. What decision would Remox make using the mean variance rule?
f. What decisions would Remox make using the coefficient of variation rule?

Using the information from above what decision would Remox make using each of the following rules if it had no idea of the probability of a tariff?

a. Maximax
b. Maximin
c. Minimax regret
d. Equal probablity criterion

Solution Preview

Please refer attached file for complete solution.

a. Compute the expected profits for both options
Expected profit for option A=0.70*1200000+0.30*800000=$1,080,000
Expected profit for option B=0.70*875000+0.30*1000000=$912,500

b. Based on the expected profit only, which option should Remox use?
Expected profit is higher in case of option A. It should be used.

c. Compute the probabilities that would make Remox indifferent between options A and B using that rule
Let the probability that tariff will pass be p
Expected profit for option A =(1-p)*1200000+p*800000=1200000-1200000p+800000p=1200000-400000p
Expected profit for option B =(1-p)*875000+p*1000000=875000-875000p+1000000p=875000+125000p

Remox will be indifferent if expected profit from both of the options is same.
i.e. ...

Solution Summary

Solution determines the better option by using various decision making models.

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