The Islander Fishing Company purchases clams for $1.50 per pound from fishermen

Question

The Islander Fishing Company purchases clams for $1.50 per pound from fishermen and sells them to various restaurants for $2.50 per pound. Any clams not sold to the restaurants by the end of the week can be sold to a local soup company for $0.50 per pound. The company can purchase 500, 1000, or 2000 pounds. The probabilities of various levels of demand are as follows:

Demand (Pounds) Probability
500                         0.20
1000                        0.40
2000                        0.40

Construct a Payoff Table, an Opportunity Loss Table an Expected Monetary Value Table, and the Expected Value of Perfect Information calculations and answer. Probabilities are .2, .4, & .4. Use the setup below.

500 1000 200 500 1000 2000

Explanation / Answer

excel formula:

Payoff table Alternatives Scenarios for alternatives Demand-500 Demand-1000 Demand-2000 Probability of this scenario 20% 40% 40% Order 500 500 500 500 Order 1000 0 1000 1000 Order 2000 -1000 0 2000 Alternatives Scenarios for alternatives Demand-50 Demand-100 Demand-150 Probability of this scenario 20% 40% 40% Expected value for the alternative Order 500 500 500 500 500 Order 1000 0 1000 1000 800 Order 2000 -1000 0 2000 600 (highest gain) Go for-> Order 2000 Expected value with Perfect Information 1300 Expected value without Perfect Information 800 Expected value for Perfect Information (EVIP) 500

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