QUESTION 16 Mark M. Upp has just been fired as the university bookstore manager
ID: 3042270 • Letter: Q
Question
QUESTION 16 Mark M. Upp has just been fired as the university bookstore manager for setting prices too low (only 20 percent above suggested retail). He is considering opening a competing bookstore near the campus, and he has begun an analysis of the situation. There are two possible sites under consideration. One is relatively small, while the other is large. If he opens at Site 1 and demand is good, he will generate a profit of $50,000. If demand is low, he will lose $10,000. If he opens at Site 2 and demand is high, he will generate a profit of $80,000, but he will lose $30,000 if demand is low. He also has the option of not opening either. He believes that there is a 50 percent chance that demand wil be high. Mark can purchase a market research study He can buy a market research which provides him with certainty about the market. What is the maximum amount he should pay for any study? TTTParagraphArial3 (12pt)TExplanation / Answer
The Payoff Matrix is,
Maximum amount to be paid for the study is EVPI
EVPI = EVwPI - EVwoPI
where EVPI is expected value of perfect information
EVwPI is expected value with perfect information
EVwoPI is expected value without perfect information
EVwPI is sum of product of probabilities with maximum payoff for each demand.
EVwPI = 0.5 * $80,000 + 0.5 * (-$10,000) = $35,000
EVwoPI is the maximum EMV (expected monetatry value) for each alternative.
EMV for Site 1 = 0.5 * $50,000 + 0.5 * (-$10,000) = $20,000
EMV for Site 2 = 0.5 * $80,000 + 0.5 * (-$30,000) = $25,000
Maximum EMV is $25,000 for site 2.
So, EVwoPI = $25,000
EVPI = EVwPI - EVwoPI = $35,000 - $25,000 = $10,000
Hence, the maximum amount to be paid for the study is $10,000
Demand Good (Prob = 0.5) Low (Prob = 0.5) Site 1 $50,000 -$10,000 Site 2 $80,000 -$30,000Related Questions
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