A concessionaire for the local ballpark has developed a table of conditional val

Question

A concessionaire for the local ballpark has developed a table of conditional values for the various alternatives (stocking decisions) and states of nature (size of crowd). Stocking Decision Large Crowd ($) Average Crowd ($) Small Crowd ($) Large Inventory $22,000 $12,000 -$2,000 Average Inventory $15,000 $12,000 $6,000 Small Inventory $9,000 $6,000 $5,000 If the probabilities associated with the states of nature are 0.30 for a large crowd, 0.50 for an average crowd, and 0.20 for a small crowd, determine: 1. The alternative that provides the greatest expected monetary value (EMV). 2. The expected value of perfect information (EVPI).

Explanation / Answer

Large stock = 22000 * 0.30 + 12000 * 0.50 + (-) 2000 * 0.20

= $ 12200

Average stock = 15000 *0.30 + 12000 * 0.50 + 6000 * 0.20

= $ 11700

Small stock = 9000 * 0.30 + 6000 * 0.50 + 5000 * 0.20

= $ 6700

Maximum (expected monetary value ) EMV = $ 12200 [ Large Stock ]

2. Best column

EPPI = 22000 * 0.30 + 12000 * 0.50 + 6000 * 0.20

= $ 13800

The expected value of perfect information (EVPI) = EPPI - EMV

= 13800 - 12200

= $ 1600

Large crowd Average crowd Small crowd Large stock 22000 12000 (-) 2000 Average stock 15000 12000 6000 Small stock 9000 6000 5000 Probabilities 0.30 0.50 0.20

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