Given the following payoff table and probabilities for states of nature, determi

Question

Given the following payoff table and probabilities for states of nature, determine the optimum policy for the decision maker in this newsvendor problem. Actual Demands 40 0.4 400 Order Quantity20 60 0.2 Probabilities 4 400 Decision 1 Decision 2 Decision 20 40 60 Order Actual Demand: Quantity 20 40 60 20.40.40 Probabilities979 Decision 1: 20 200 150 400 Decision 2: 40 200 400 150 Decision 3: 60 100 300 300 1) decision one 2) decision two 3) decision three 4) all decisions are equally profitable 5) none of the above

Explanation / Answer

Expected Value of Decision 1 = 0.2*200 + 0.4*150+0.4*400 = 260

Expected Value of Decision 2 = 0.2*200 + 0.4*400+0.4*150 = 260

Expected Value of Decision 1 = 0.2*100 + 0.4*300 +0.4*300 = 260

Therefore we can say 4) All decisions are equally profitable.

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