Thomas Manufacturing Company has $100,000 available to invest. John Thomas, the

Chapter 0, Problem 13

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Thomas Manufacturing Company has $100,000 available to invest. John Thomas, the president and CEO of the company, would like to either expand his production, invest the money in stocks, or purchase a certificate of deposit from the bank. Of course, the unknown is whether the economy will continue at a high level or there will be a recession. He estimates the likelihood of a recession at .20. Whether there is a recession or not, the certificate of deposit will result in a gain of 6 percent. If there is a recession, he predicts a 10 percent loss if he expands his production and a 5 percent loss if he invests in stocks. If there is not a recession, an expansion of production will result in a 15 percent gain, and stock investment will produce a 12 percent gain.

a. What decision should he make if he uses the maximin strategy?

b. What decision should John Thomas make if the maximax strategy is used?

c. What decision would be made if he uses the expected monetary value criterion?

d. What is the expected value of perfect information?