Automobile Production, part 2. The automobile company has now done a bit more research and believes that the demand for high-end cars has changed, so that now the low demand is 60% likely and the high demand is only 10% likely. How does this change your responses to Exercise 37? Find the new RRR. Does your recommendation to the company change?

Exercise 37

Automobile Production. An automobile company is deciding which cars to produce. The company has a choice between two models: a high-end model selling at $45,000, and a moderately priced model selling at $25,000. The payoff table shows monthly sales for each model. Based on past experience, the automobile company makes the following assumption about the demand for the high-end car. Demand will be low, moderate, or high with probabilities 0.4, 0.4, and 0.2, respectively. The company also assumes that if demand is low for the high-end car, it will be higher for the moderately priced car.

a) Compute the EV for each alternative product (decision).

b) Compute the SD for each decision.

c) Compute the CV and RRR for each decision.

d) Which car would you produce and why?