The new owner of a beauty shop is trying to decide whether to hire one, two, or

Question

The new owner of a beauty shop is trying to decide whether to hire one, two, or three beauticians. She estimates that profits next year (in thousands of dollars) will vary with demand for her services, and she has estimated demand in three categories, low, medium, and high.

If she feels the chances of low, medium, and high demand are 50 percent, 20 percent, and 30 percent respectively, what are the expected annual profits for the number of beauticians she will decide to hire?

Multiple Choice

$50,000

$55,000

$70,000

$154,000

$54,000

NUMBER OF BEAUTICIANS DEMAND LOW MEDIUM HIGH One 50 75 100 Two 0 100 100 Three (100 ) 70 300

Explanation / Answer

Expected payoffs in all three cases

One beautician- 0.5x50+0.2x75+0.3x100 =70

Two beauticians - 0.5x0+0.2x100+0.3x100 = 50

Three beauticians- 0.5x (-100)+0.2x70+0.3x300 =54

Hence first option with one beautician is the most favourable with a payoff of 70000.

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