Edges Bookstore needs to decide how many copies new paperback to purchase. The s

Question

Edges Bookstore needs to decide how many copies new paperback to purchase. The store book has estimated that demand will be 50, 100 150 or 200 copies next month and has to decide whether to order 50, 100, 150 or 200 books for this period. Each book costs $8.50 and can be sold for $15.00. Any unsold books will be sent back to the publisher for a $3.50 refund. Edges has researched the market and expects the probability of selling 50 books as 0.2, 100 books as 0.35 150 books as 0.25 and 200 books as 0.20. Construct a payoff table for this problem (alternatives matching the demand levels.) Calculate the Expected Value for each alternative. Give a recommendation to Edges as to how many books they should order. Calculate the EV with PI and the Ev of PI for this problem. How would you interpret the Ev of PI result?

Explanation / Answer

(a)

(b) Expected value for each:

(c) Order 150 books since it has maximum expected value.

(d)

(e) If we have perfect information of these probability values, the Edges can earn $252.5 profit more as compared to the one if we don't have perfect information.

Payoff table Alternatives Scenarios for alternatives Demand-1 Demand-2 Demand-3 Demand-4 50 100 150 200 Probability of this scenario 20% 35% 25% 20% Order 50 325 325 325 325 Order 100 75 650 650 650 Order 150 -175 400 975 975 Order 200 -425 150 725 1300

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