The operator of a news stand has the option of buying 10, 15 or 20 newspapers fo

Question

The operator of a news stand has the option of buying 10, 15 or 20 newspapers for resale at the stand. Papers cost ten cents ($0.10) each, and sells for twenty five ($0.25) each. Newspapers that are unsold during the day are worthless.

A. Set up the payoff table that the stand operator has for the sales of newspaper

B. If probability of selling 10, 15 or 20 newspapers is 0.5, 0.3 and 0.2 respectively. How many newspapers should the stand operator purchase if his decision is based on the expected value concept?

Explanation / Answer

A) Pay off table

B) Statement showing expected value

Thus he should buy 14 newspaper

Particulars Units=10 Units=15 Units=20 SPPU 0.25 0.25 0.25 Cost 0.1 0.1 0.1 Units 10 15 20 Total profit 1 1.5 2

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