The officer in charge of a United States Embassy recreation program has decided
ID: 2809031 • Letter: T
Question
The officer in charge of a United States Embassy recreation program has decided to replenish the employees club funds by arranging a dinner. It rains nine days out of ten at the post and he must decide whether to hold the dinner indoors or out. An enclosed pavilion is available but uncomfortable, and past experience has shown turnout to be low at indoor functions, resulting in a 60 per cent chance of gaining $100 from a dinner held in the pavilion and a 40 per cent chance of losing $20. On the other hand, an outdoor dinner could be expected to earn $500 unless it rains, in which case the dinner would lose about $10"
5) If the dinner is held indoors, her expected net income will be:
A) --$68
B) --$20
C)$100
D) $52
E) +$500
6) If the dinner is held outdoors, her expected net income will be:
A) $490
B) --$500
C) $41
D) --$10
E) +$510
7) Where should she hold the dinner?
A) Indoors because its expected net income is more than that of the outdoors
B) Outdoors because its expected net income is more than that of the indoors.
C) Either indoors or outdoors because the expected net incomes of both is equal.
D) Neither indoors nor outdoors because the expected net income of both is negative.
expected value payoff" probability attendance fair 0.6 Indoors 100 0.6 60 EV 52 attendance ver 0.4 -20 0.4 Indoors (52) no rain, attendance great 0.1 Outdoors 500 50 2 EV-41 rain, attendance poor 0.9 -10 0.9Explanation / Answer
Part 5 )
If the dinner is held indoors, then the expected payoff will be equal to :-
(Probability of attendance being fair * Expected Payoff if attendance is fair) + (Probability of attendance being poor* Expected Payoff if attendance is poor)
= (0.6*100) + (0.4*(-20))
=60 - 8
=52
So the correct option is Option D
Part 6 )
If the dinner is held outdoors, then the expected payoff will be equal to :-
(Probability of no rain, attendace being great * Expected Payoff ) + (Probability of rain, attendance being poor* Expected Payoff)
= (0.1*500) + (0.9*(-10))
=50 - 9
=41
So the correct option is Option C
Part 7)
You will need to consider the expected value in both cases. Clearly, the expected the value in part 5 or having it indoors($52) is more than Part 6) which is outdoors($41), he should hold it indoors. So Option A is correct. Rest of the options are incorrect.