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Dear all,
Please help to carried out the example 1, page 46, chapter 10 RISK AND UNCERTAiNTY of Opentuition Leture Note.
when calculate the Expected value of each contract, whether or not we should divide contribution of contract without probability plus contribution of uncertain ordering with probability.
Cuz in example of video record the contribution is combined together ????
Thanks & Regards
I’m puzzled with your question and may answer something wrong : )
Maximum capacity is 1,200 units. For each size of contract uncertainty exists (400 units*20% probability, 500 units*30% probability etc), and for each uncertainty different profits may be received (company will produce 300 u with $3 profit, and others units depends on max capacity or max demand – with $5 profit). For each size of contract company will have four outcomes with different probabilities and expected value of contract should include all this mixes of probabilities.
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