St. Jacobs Cheese Factory (SJCF) is getting ready for a busy tourist season. SJCF wants to either increase production or produc e the same amount as last year, depending on the demand level for the coming season. SJCF estimates the probabilities for high, medium, and low demands to be 0.4, 0.35, and 0.25, respectively, on the basis of the number of tourists forecasted by the local recreational bureau.
If SJCF increases production, the expected profits corresponding to high, medium, and low demands are S750 000, S350 000, and S100 000, respectively. If SJCF does not increase production, the expected profits are $500 000, $400 000, and $200 000, respectively.
(a) Construct a decision tree for $JCF. On the basis of EY, what should $JCF do?
(b) Construct a cumulative risk profile for both decision alternatives. Does either outcome or first-order stochastic dominance exist?