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2) Mick Karra is the manager of MCZ Drilling Products, which produces a variety of specialty valves for oil field

equipment. Recent activity in the oil fields has caused demand to increase drastically, and a decision has been made to open a new manufacturing facility. Three locations are being considered, and the size of the facility would not be the same in each location. Thus, overtime might be necessary at times. The following table gives the total monthly cost (in $1,000s) for each demand possibility. The probabilities for the demand levels have been determined to be 20% for low demand, 30% for medium demand, and 50% for high demand. DEMAND IS LOW DEMAND IS MEDIUM DEMAND IS HIGH Ardmore, OK 75 140 150 Sweetwater, TX 90 145 145 Lake Charles, LA 110 130 135

a) Which location would be selected based on the optimistic criterion?

b) Which location would be selected based on the pessimistic criterion?


c) Which location would be selected based on the minimax regret criterion?

d) Which location would be selected to minimize the expected cost of operation?

e) How much is a perfect forecast of the demand worth? f) Which location would minimize the expected opportunity loss? g) What is the expected value of perfect information in this situation

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