An Operations Manager at company X, is evaluating alternatives for increasing ca
ID: 3316774 • Letter: A
Question
An Operations Manager at company X, is evaluating alternatives for increasing capacity. He has identified four alternatives, and has constructed the following payoff table which shows payoffs (in $1,000,000's) for the three possible levels of market demand.
Market Demands
Alternative
Low
Medium
High
Lease New Equipment
-0.5
2
4
Purchase New Equipment
-3
0.5
6
Add Third Shift
0.5
0.75
1
Do Nothing
0
0
0
The opportunity loss for the combination “Purchase New Equipment” and “Low” is ____.
a) 0.5
b) 1.5
c) 2.5
d) 3.0
Market Demands
Alternative
Low
Medium
High
Lease New Equipment
-0.5
2
4
Purchase New Equipment
-3
0.5
6
Add Third Shift
0.5
0.75
1
Do Nothing
0
0
0
Explanation / Answer
Solution
The opportunity Loss is defined as the difference between highest possible profit for a state of nature and the actual profit obtained for the particular action taken
So opportunity loss = 2.5
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