A decision-maker has to choose from among four mutually exclusive capacity options. Each option has a payoff associated with future demand states. The options and associated payoffs (in $millions) are as follows:
Options
Demand Standing Small Subcontract Large
States Pat Expansion Hybrid Expansion
Slow -5.0 1.0 -2.0 -6.0
Modest 0.0 3.0 4.0 -3.0
Booming 0.0 4.5 4.0 7.0
Suppose that the probability of a Booming demand state is 0.3. Further suppose that the Slow and Modest demand states are equally likely. What would be the expected value of the option that should be chosen?
Answers:
A. Not in excess of $1.75 million
B. In excess of $1.75 million but not in excess of $2.15 million
C. In excess of $2.15 million but not in excess of $2.65 million
D. In excess of $2.65 million but not in excess of $3.15 million
E. In excess of $3.15 million