A manager is trying to decide whether to buy one machine or two. If only one mac

Question

A manager is trying to decide whether to buy one machine or two. If only one machine is purchased and demand proves to be excessive, the second machine can be purchased later. Some sales would be lost, however, because the lead time for delivery of this type of machine is six months. In addition, the cost per machine will be lower if both machines are purchased at the same time. The probability of low demand is estimated to be 0.30 and that of high demand to be 0.70. The after-tax NPV of the benefits from purchasing two machines together is $90 comma 000 if demand is low and $170 comma 000 if demand is high. If one machine is purchased and demand is low, the NPV is $100 comma 000. If demand is high, the manager has three options: (1) doing nothing, which has an NPV of $100 comma 000; (2) subcontracting, with an NPV of $150 comma 000; and (3) buying the second machine, with an NPV of $140 comma 000. a. Choose the correct decision tree for this problem. Note that each payoff is given in thousands of dollars. A. 1 Buy 1 Buy 2 Low demand High demand machine machines Subcontract Buy 2 Do nothing 2 0.30 0.70 0.30 150 100 140 machines 90 100 Low demand x y graph B. 1 Buy 1 Buy 2 Low demand High demand machine machines Subcontract Buy 2 Do nothing 2 Low demand High demand 0.30 0.70 0.30 0.70 150 100 140 machines 90 170 100 x y graph C. 1 Buy 2 Buy 1 Low demand High demand machines machine Subcontract Buy 2 Do nothing 2 Low demand High demand 0.70 0.30 0.70 0.30 150 100 140 machines 90 170 100 x y graph D. 1 Buy 1 Buy 2 Low demand High demand machine machines Subcontract Buy 2 Do nothing 4 Low demand High demand 150 100 140 machines 100 170 90 2 3 x y graph b. What is the best decision and what is its expected payoff? Best decision is to buy nothing machine(s) and its expected payoff is $ nothing. (Enter your responses as integers.)

Explanation / Answer

A payoff matrix, or payoff table, is a simple chart used in basic game theory situations to analyze and evaluate a situation in which two parties have a decision to make. The matrix is typically a two-by-two matrix with each square divided in half, with one half for each person involved.

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