A Company Must Decide Whether or Not to Change Its

Essay

A company must decide whether or not to change its packaging to a more environmentally safe material. The impact of the decision on profits depends on which of the following three possible scenarios develops in the future.
Scenario 1:
The media do not focus heavily on concerns about packaging, and no new laws requiring changes in packaging are passed. Under this scenario, the company will make $35 million if they change their packaging now, but will make $75 million if they do not change their packaging now.
Scenario 2:
The media focus heavily on concerns about packaging, and no new laws requiring changes in packaging are passed. Under this scenario, the company will make $50 million if they change their packaging now, but will make $55 million if they do not change their packaging now.
Scenario 3:
The media focus heavily on concerns about packaging, and new laws requiring changes in packaging are passed. Under this scenario, the company will make $60 million if they change their packaging now, but will make only $15 million if they do not change their packaging now.
The prior probabilities of the three scenarios are 0.3, 0.5 and 0.2, respectively.
a. Develop a payoff table for this decision situation.
b. What decision will be made to maximise expected payoff?
c. What is the most the company should be willing to pay for a research study designed to reduce its uncertainty about media and legal developments concerning packaging?
d. Set up the opportunity loss table.
e. Which decision has the minimum expected opportunity loss?