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

Question

7. 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

$15,000

$12,000

-$1,000

Average Inventory

$12,500

$25,000

$7,500

Small Inventory

$4,000

$3,000

$2,500

You may use Excel QM or QM for Windows:

If the probabilities associated with the states of nature are 0.20 for a large crowd, 0.25 for an average crowd, and 0.55 for a small crowd, determine:

The alternative that provides the greatest expected monetary value (EMV).

Answer:  

Explanation (including any calculations or software output):

The expected value of perfect information (EVPI).

Answer:  

Explanation (including any calculations or software output):

Stocking Decision

Large Crowd ($)

Average Crowd ($)

Small Crowd ($)

Large Inventory

$15,000

$12,000

-$1,000

Average Inventory

$12,500

$25,000

$7,500

Small Inventory

$4,000

$3,000

$2,500

Explanation / Answer

The expected monetary value for large inventory = 0.20 X $ 15,000 + 0.25 X $ 12,000 + 0.55 X ( -$1,000)

Expected monetary value for large inventory = $ 5,450

Expected monetary value of average inventory = 0.20 X $ 12,500 + 0.25 X $ 25,000 + 0.55 X $ 7500

Expected monetary value of average inventory = $ 12,875

Expected monetary value of small inventory = $ 4000 X 0.20 + $ 3000 X 0.25 + $ 2500 X 0.55

Expected monetary value of small inventory = $ 2,925

The alternative that provides the greatest expected monetary value (EMV) is Average inventory

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EVPI = Expected value given information - Expected value without information

EVPI = [0.20 X $ 15,000 + 0.25 X $ 25,000 + 0.55 X $ 7500] - [ $ 12,875]

EVPI = $ 500

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