Andrew Thomas, a sandwich vendor at Hard Rock Cafe\'s annual Rockfest, created a
ID: 2792006 • Letter: A
Question
Andrew Thomas, a sandwich vendor at Hard Rock Cafe's annual Rockfest, created a atives (stocking decisi of nature (size of crowd): STATES OF NATURE (DEMAND) BIG ALTERNATIVES Large stock Average stock Small stock SMALL $2,000 $6,000 $4,000 AVERAGE 22,000 $12,000 14,000 $10,000 $9,000 The probabilities associated with the states of nature are 0.3 for a big demand, 0.5 for an average demand, and 0.2 for a small demand. a) Determine the alternative that provides Andrew the greatest expected monetary value (EMV). b) Compute the expected value of perfect information (EVPI)Explanation / Answer
EMV(A1)=22000*.3+12000*.5-2000*.2 12,200 EMV(A2)=14000*.3+10000*.5+6000*.2 10,400 EMV(A3)=9000*.3+8000*.5+4000*.2 7,500 Greatest expected monetory Value (EMV)=12,200 Calculation EVPI Maximum value in each nature to be multiplied by Probabilities EVPI=22000*.3+12000*.5+6000*.2 13,800