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 20%; strong acceptance has a probability of 80%. The payoffs are as follows. Small job shop, moderate market = $44,000; Small job shop, strong market = $75,000. Medium job shop, moderate market = $60,000; medium job shop, strong market = $89,000. Large job shop, moderate market = -$15,000; large job shop, strong market = $102,000. Which capacity choice should the firm make?
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