Essay
A firm is weighing three capacity alternatives: small, medium, and large job shop. Whatever capacity choice is made, the market for the firm's product can be "moderate" or "strong." The probability of moderate acceptance is estimated to be 30%; strong acceptance has a probability of 70%. The payoffs are as follows. Small job shop, moderate market = $20,000; Small job shop, strong market = $57,000. Medium job shop, moderate market = $25,000; medium job shop, strong market = $84,000. Large job shop, moderate market = -$5,000; large job shop, strong market = $106,000. Which capacity choice should the firm make?
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