Clay Whybark, a soft-drink vendor at Hard Rock Cafe%u2019s annual Rockfest, crea

Question

Clay Whybark, a soft-drink vendor at Hard Rock Cafe%u2019s annual Rockfest, created a table of conditional values for the various alternatives (stocking decision) and states of nature (size of crowd):

States of Nature (demand)

Alternatives Big Average Small

Large stock $24,000 $10,000 -$1,500

Average stock $16,000 $11,000 $6,500

Small stock $ 9,600 $ 8,000 $3,200


The probabilities associated with the states of nature are 0.25 for a big demand, 0.55 for an average demand, and 0.20 for a small demand.

* a) Determine the alternative that provides Clay Whybark the greatest expected monetary value (EMV).

(Large, Average or small stock)

* b) Compute the expected value of perfect information (EVPI).

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

EMV (Large Stock) = .25*24000 + .55*10000 -1500*.20 = 11200

EMV (Average Stock) = .25*16000 + .55*11000 + 6500*.20 = 11350

EMV (Small Stock) = .25*9600 + .55*8000 + 3200*.20 = 7440

Average Stock offers the greatest expected monetary value (EMV).

Part B:

EVPI = 24000*.25 + .55*11000 + .20*6500 - 11350 = 2000

Thanks.

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