please explain how you got each part. thanks! 5, S. University Bookstore is plan

Question

please explain how you got each part. thanks!

5, S. University Bookstore is planning to buy back used books and sell them in the next academic year. But the problem is that University Bookstore does not know the real demand. According to past experience, the related profit and probability for different inwentory level and demand level is listed in the following table. DEMAND INVENTORY OW d. MEDRUM idl HIGH Id,) $18,000 $8,000 -$10,000 30% MEDIUM (sl $25,000 36,000 $5,000 HIGH (s) $32,000 $25,000 $48,000 30% PROBABILITY 40% a. Find the inventory level for University Bookstore, if it uses the EMV approach. b. University Bookstore plans to spend s5,000 to do a survey to get the perfect information. Do you think it is a good idea or bad idea c. Use Precision Tree to find the optimal strategy. What is the risk profile for the optimal strategy?

Explanation / Answer

a) EMV approach

EMV for LOW (d1) = 18000*30% + 25000*40% + 32000*30% = 25,000

EMV for MEDIUM (d2) = -8000*30% + 36000*40% + 25000*30% = 19,500

EMV for HIGH (d3) = -10000*30% - 5000*40% + 48000*30% = 9,400

EMV of LOW(d1) is maximum. Therefore, this is chosen alternative.

Best EMV = 25,000

b) Expected Value with Perfect Information (EVwPI) = Max payoff under Low demand * 30% + Max payoff under Medium demand * 40% + Max payoff under High demand * 30%

= 18000*30% + 36000*40% + 48000*30% = 34,200

Expected Value of Perfect Information (EVPI) = EVwPI - EMVmax = 34200 - 25000 = 9,200

EVPI is more than 5000 , therefore, it is a good idea to to a survey to get perfect information by spending $ 5000

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