Question

Morley Properties can hire a consultant to predict the most likely level of demand for this project. This consultant has done many similar studies and has provided Morley Properties with the following conditional probability table, that is, P(Actual Demand | Forecast Demand):

Actual Demand
Forecast Demand Low Medium High
Low 0.8000 0.1500 0.0500
Medium 0.1000 0.8000 0.1000
High 0.0500 0.1000 0.8500
For example: P(Actual Demand=Medium | Forecast Demand=Low) = 0.15
Morley Properties estimates that the probability that she forecasts Low, Medium and High demand is as follows: 0.2175, 0.3550 and 0.4275, respectively.
What is the EMV of the optimal decision without the consultant's assistance?

Answer 1

To determine the EMV of the optimal decision without a consultant, multiply the estimated profits for low, medium, and high demand by their respective probabilities and add them together. Without specific profit figures, the exact value cannot be calculated, but the highest EMV indicates the optimal decision.

Step-by-step explanation:

To calculate the Expected Monetary Value (EMV) of the optimal decision without the consultant's assistance we need to weigh the possible outcomes by their probabilities and sum these products. In the given scenario, assume Morley Properties has estimated profits based on low, medium, and high demand, even though these profit values are not provided in the question. We will denote these profit levels as ProfitLow, ProfitMedium, and ProfitHigh, respectively.

The EMV for each forecast demand level would be calculated as follows:

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Then, the total EMV without the consultant's assistance would be:

EMVTotal = EMVLow + EMVMedium + EMVHigh

Since specific profit values are not provided we cannot calculate the exact EMV in this response. However, the process involves multiplying the respective profit levels with the probabilities of forecasting low, medium, and high demand, which are 0.2175, 0.3550, and 0.4275, respectively. The decision with the highest EMV would be considered the optimal one without the consultant's assistance.