Part 2b: You are considering purchasing some stocker steers. You feel there is a
ID: 3052480 • Letter: P
Question
Part 2b: You are considering purchasing some stocker steers. You feel there is a 15% chance of good weather, 50% chance of average weather, and 35% chance of poor weather. If 200 steers are purchased, the net return is $31,000 with good weather, $16,000 with average weather, and ($9,000) with poor weather. If 300 steers are purchased, the net return is $35,000 with good weather, $18,000 with average weather, and ($12,000) with poor weather. If 400 steers are purchased, the net return is $50,000 with good weather, $19,000 with average weather, and ($22,000) with poor weather. Fill in the payoff matrix below. Net return for each purchase strategy Weather outcomes Probability Buy 200 Buy 300 Buy 400 Good Average Poor Expected value Minimum value Maximum value Range Based on the above results, which option would you choose and why? Part 2b: You are considering purchasing some stocker steers. You feel there is a 15% chance of good weather, 50% chance of average weather, and 35% chance of poor weather. If 200 steers are purchased, the net return is $31,000 with good weather, $16,000 with average weather, and ($9,000) with poor weather. If 300 steers are purchased, the net return is $35,000 with good weather, $18,000 with average weather, and ($12,000) with poor weather. If 400 steers are purchased, the net return is $50,000 with good weather, $19,000 with average weather, and ($22,000) with poor weather. Fill in the payoff matrix below. Net return for each purchase strategy Weather outcomes Probability Buy 200 Buy 300 Buy 400 Good Average Poor Expected value Minimum value Maximum value Range Based on the above results, which option would you choose and why?Explanation / Answer
Here as the maximum expected value is for buying 300 stocker steers so we shouldpurchase 300 stocker steers.
Here expected value is calculated by
Expected value = Pr(Good weather) * Return with good weather + Pr(Averge weather)* Return with average weather + Pr(Bad weather) * return with bad weather.
Net return for each purchase strategy Weather outcomes Probability Buy 200 Buy 300 Buy 400 Good 0.15 $31,000 $35,000 $50,000 Average 0.5 $16,000 $18,000 $19,000 Poor 0.35 ($9,000) ($12,000) ($22,000) Expected value $9,500 $10,050 $9,300 Minimum value ($9,000) ($12,000) ($22,000) Maximum value $31,000 $35,000 $50,000 Range $40,000 $47,000 $72,000