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A manufacturer should decide whether to extend credit to the retailer who would like to open the account with the firm. Past experience with the new accounts points out that 45% are high-risk customers, 35% are moderate-risk customers, and 20% re low-risk customers. If credit is extended, the manufacturer can expect to lose $60,000 with the high-risk cutomer, make $50,000 with the moderate-risk customer, and make $100,000 with the low-risk customer. If the manufacturer decides not extend credit to customer, the manufacturer neither make nor loses any money. Prior to making the credit extension decision, the manufacturer can get a credit rating agency concedes that its rating procedure isn't completely reliable. In particular, the credit rating procedure will rate the low-risk customer as moderate-risk customer with probability 010 and as ahigh-risk customer with probability 0.05. Furthermore, the given rating procedure will rate the moderate-risk customer as a low-risk customer with probability 0.06 and as high-risk customer with probability 0.07. At last, 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.

1. Determine the strategy which maximizes the manufacturer's expected net earnings.

2. Should the manufacturer routinely get credit rating reports on those retailers who seek credit approval? Why or why not?

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  • Reference No.:- M923347

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