of the exam you must remain Examinason Rules 5 Marks) Problem 1 Maria Rojas is c
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of the exam you must remain Examinason Rules 5 Marks) Problem 1 Maria Rojas is considering the possibility of opening a small dress shop on Fairbanks Avenue, a few blocks from the universty. She has located a good mall that atracts students. Her options are to apen a small shop, a medum-sized shop, or no shop at all. The market for a dress shop can be good average, or bad. The probablities for these three possibilies are 02 for a good market, 0.4 for an average market and 0.4 for a bad market The net profit or loss for the medum-sized and small shops for the various market conditions are given in the following table. Building no shop at all yields no loss and no gain Good Market Average Market Bad Market Small Shop Medium sized shop 5,000 100,000 25.000 5.000 80,000 a. What is the best decision based on the expected retum b. What is the maximum amount that could be paid to the consultants for a betler forecast of the future Problem 2 Qatar University has a projedt which was planned using PERT wth three time estimates. The expected 5 Marks)Explanation / Answer
Problem 1.
a. We will calculate the expected monetary value (EMV) based on the weighted average expected profits or losses.
For a Small shop, probability based expected profit/losses EMV is -
75000x0.2 (Good Market Profit) + 25000 x 0.4(Average Market Profit) - 40000 x 0.4 (Bad Market Loss))
= 15000 + 10000 -16000 = 9,000
Similarly, for medium sized shop, probability based expected profit / loss EMV is -
100,000x0.2 ( good market profit) + 35,000 x 0.4 ( average market profit) - 60,000x0.4 ( bad market loss)
= 20,000+14,000-24,000 = 10,000
Therefore, Maria Rojas should go for a medium sized shop, based on the results which are better than a small shop.
However, one more important aspect missing here can be considered; which is the initial investment required for the two Ventures.
b. Expected value with perfect information EVwPI is the long run average return if we have the perfect information to make a decision
It places an upper cap on the amount which should be paid for additional perfect information.
For Small shop,
EVwPI = 75000x0.2 + 25000x0.4 + 0x0.4 =15,000+10,000= 25,000
EVwPI - EMV =
25,000 - 9,000 = 16,000
For medium size shop,
EVwPI = 100,000x0.2 + 35,000x0.4 + 0x0.4 = 20,000+14,000 = 34,000
EVwPI - EMV =
34,000-10,000 = 24,000.
So, the consultant can be paid a maximum amount of 24,000.
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