Star Products

Star Products, Inc. faces uncertain demand conditions in 2012. Management at Star

Products is considering three different levels of output for 2012: 1, 1.5, or 2 million units.

Management has determined that the following profit levels will occur under weak and

strong demand conditions:

Profit (in $millions) if

Demand is

Output Level Weak Strong

1 million units 60 175

1.5 million units 50 200

2.0 million units –50 400

1. Using each of the four rules for decision making under uncertainty, determine the output level of 2012.

Maximax rule ______________ units of output

Maximin rule ______________ units of output

Minimax regret rule ______________ units of output

Equal probability rule ______________ units of output

2. Now suppose that management believes the probability of weak demand in 2012 is

25% and the probability of strong demand is 75%. Compute the expected profit,

variance, standard deviation, and coefficient of variation for each level of output:

Output E(π ) 2


σ υ

1 million units

1.5 million units

2.0 million units

3. Based on the expected value rule, Star Products should produce ________ units in 2012

4. Using mean-variance analysis, which level of output should be chosen? Explain your answer.

5. Using the coefficient of variation rule, Star Products should produce ______ units in 2012. Explain briefly.