+
A MANUFACTURER MUST DECIDE WHETHER TO EXTEND CREDIT TO A RETAILER

A MANUFACTURER MUST DECIDE WHETHER TO EXTEND CREDIT TO A RETAILER

Rating:
Rating
(0)
Author: Christine Farr
Description:

http://theperfecthomework.com/a-manufacturer-must-decide-whether-to-extend-credit-to-a-retailer-who-would-like-to-open-an-account-with-the-firm/

A manufacturer must decide whether to extend credit to a retailer who would like to open an account with the firm. Past experience with new accounts indicates that 45% are high-risk customers, 35% are moderaterisk customers, and 20% are low-risk customers. If credit is extended, the manufacturer can expect to lose $60,000 with a high-risk customer, make $50,000 with a moderate-risk customer, and make $100,000 with a low-risk customer. If the manufacturer decides not to
extend credit to a customer, the manufacturer neither makes nor loses any money. Prior to making a credit extension decision, the manufacturer can obtain a credit rating report on the retailer at a cost of $2000.
The credit agency concedes that its rating procedure is not completely reliable. In particular, the credit rating procedure will rate a low-risk customer as a moderaterisk customer with probability 0.10 and as a high-risk customer with probability 0.05. Similarly, the given rating procedure will rate a moderate-risk customer as a low-risk customer with probability 0.06 and as a high-risk customer with probability 0.07. Finally, the rating procedure will rate a high-risk customer as a low-risk customer with probability 0.01 and as a moderate-risk customer with probability 0.05. Find the strategy that maximizes the manufacturer’s expected net earnings. (Note: If you set up the input section of your spreadsheet in the right way, you will be able to perform all of the Bayes’ rule calculations with a couple of copyable formulas.).  Also, make sure to compute and interpret EVSI for this decision problem. (hint: 
Optimal net earnings = $31,655)

(more)
See More
Try a College Course Free

Sophia’s self-paced online courses are a great way to save time and money as you earn credits eligible for transfer to over 2,000 colleges and universities.*

Begin Free Trial
No credit card required

25 Sophia partners guarantee credit transfer.

221 Institutions have accepted or given pre-approval for credit transfer.

* The American Council on Education's College Credit Recommendation Service (ACE Credit®) has evaluated and recommended college credit for 20 of Sophia’s online courses. More than 2,000 colleges and universities consider ACE CREDIT recommendations in determining the applicability to their course and degree programs.

Tutorial