Andrew Thomas, a sandwich vendor at Hard Rock Cafe\'s annual Rockfest, created a
ID: 399248 • Letter: A
Question
Andrew Thomas, a sandwich vendor at Hard Rock Cafe's 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) Small - $2,500 Alternatives Large Stock Average Stock Small Stock Big $24,000 $14,000 Average $12,000 $9,000$6,500 $7,500 59.00 7 50040 $4,000 The probabilities associated with the states of nature are 0.25 for a big demand, 0.50 for an average demand, and 0.25 for a small demand a) The alternative that provides Andrew Thomas the greatest expected monetary value (EMV) is Large Stock The EMV of this decision is S 11375 (enter your answer as a whole number). b) The expected value of perfect information (EVPI) for Andrew Thomas (enter your answer as a whole number)Explanation / Answer
Solution:
(a) Expected Monetary Value (EMV) is calculated as,
EMV = Sum of (Probabilities x States of nature of each alternative)
EMV (Large Stock) = (0.25 x 24,000) + (0.50 x 12,000) - (0.25 x 2,500) = $11,375
EMV (Average Stock) = (0.25 x 14,000) + (0.50 x 9,000) + (0.25 x 6,500) = $9,625
EMV (Small Stock) = (0.25 x 9,000) + (0.50 x 7,500) + (0.25 x 4,000) = $7,000
From the above calculations,
The alternative that provides Andrew Thomas the greatest expected monetary value (EMV) is Large Stock.
The EMV of this decision is $11,375
(b) The expected value of perfect information (EVPI) is calculated as,
EVPI = EVwPI - Maximum EMV
where,
EVwPI = Expected value with perfect information
EVwPI = Sum of (Probabilities x BEST States of nature of each alternative)
Best state of nature for Big = $24,000
Best state of nature for Average = $12,000
Best state of nature for Small = $6,500
EVwPI = (0.25 x 24,000) + (0.50 x 12,000) + (0.25 x 6,500) = $13,625
EVPI = EVwPI - Maximum EMV
EVPI = $13,625 - $11,375
EVPI = $2,250