n and Bill are working on a wearable biometric device that can be worn to track
ID: 3051974 • Letter: N
Question
n and Bill are working on a wearable biometric device that can be worn to track personal itness as well as work productivity (it also tells time and weather). As they are a start-up business demand only after getting customer orders. An alternative would be to make the device ahead of demand and store inventory that could be sold and delivered immediately. Another alternative would be to outsource to a supplier to lower their risk. s they are trying to keep costs down, so they are considering making the device on- But they also are worried about competitors beating them to market and missing out on profit opportunity. They are unsure of how many competitors to expect for their potential customers, so they have prepared the payoff table below of estimated profits (in $000) if faced with 0, 1, 2, or 3 competitors. Ken and Bill want to use this information to decide what strategy to follow 0 competitors 1 competitor 2 competitors 3 competitors probability3 probability .4 probability .2 probability .1 Produce on-demand Prior inventory supplier 30 60 100 25 40 65 10 30 15 5 20 100 a) What strategy would they choose to make the risk-averse choice? b) What strategy would they choose to make the risk-taking choice? c) What strategy would they choose to make the risk-neutral choice? d) Compute Ken and Bil's Expected Value of Perfect Information (EVPI Remember to show all steps in your calculations!Explanation / Answer
Expected Payoff from on-demand = 0.3*30 + 0.4*25 + 0.2*10 + 0.1*5 = 21.5
Expected Payoff from Prior Inventory = 0.3*60 + 0.4*40 + 0.2*30 + 0.1*20 = 42
Expected Payoff from Supplier = 0.3*100 + 0.4*65 + 0.2*15 + 0.1*-100 = 49
a) Risk averse choice will be to go with Prior inventory as he is getting higher payoffs for all the cases of no. of competitors over on-demand. And supplier strategy is giving negative payoff in one case.
b) Risk taking one will go with supplier strategy because overall payoff is higher and also payoff from 1st two case is also higher over other strategies.
c) Risk neutral will look at the maximum expected payoff and again will go with Supplier strategy.
d) EVPI = EVwPI - EMV = Expected Value with Perfect information - Expected Monetary Value
EMV here is 49 which is the value from the strategy giving maximum payoff.
EVwPI is calculated by taking maximum payoff from each case = 0.3*100 + 0.4*65 + 0.2*30 + 0.1*20 = 64
This, EVPI = 64 - 49 = 15
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