Question

Kris is considering taking her poutine food truck to the local wine festival to vend. She is pondering the amount of food to stock. High demand Average demand Low demand Large stock

a) Given the payoff matrix, what is her decision under maximax?

b) Given the payoff matrix, what is her decision under maximin?

c) Given the payoff matrix, what is her decision under equally likely?

d) The probability of high demand is 0.3, medium demand 0.5, and 0.2 for low demand. If she is rational and risk-neutral, which alternative should she select, given the payoffs below?

e) What is the EVPI?

High demand Average demand Low demand
Large Stock $22,000 $12,000 -$2,000
Medium Stock $14,000 $10,000 $6,000
Small Stock $9,000 $8,000 $4,000

Answer 1

A.

Under the Maxi Max criteria, the best of the greatest settlements of the considerable number of choices will be chosen.

Greatest result under enormous stock = $22000

Greatest result under medium stock = $14000

Greatest result under little stock = $9000

The , best of above result is $22000, so enormous stock elective will be chosen.

B.

Under the MaxiMin criteria, the best of the base settlements of the considerable number of options will be chosen.

Least result under enormous stock = - $2000

Least result under medium stock =$6000

Least result under little stock =$4000

The , best of the above settlements is $6000, so medium stock elective will be chosen.

C.

Under similarly likely criteria,

Expected result under the enormous stock = (22000 + 12000 - 2000)/3 = $10666.67

Expected result under the medium stock = (14000 + 10000+6000)/3 = $10000

Expected result under the little stock = (9000+8000+4000)/3 = $7000

The most extreme result is with the enormous stock other option, at that point huge stock option is chosen.

D.

With the given probabilities,

Expected result under the enormous stock = (.3*22000 + .5*12000 - .2*2000) = $12200

Expected result under the medium stock = (.3*14000 + .5*10000+ .2*6000) = $10400

Expected result under the little stock = (.3*9000 + .5*8000 + .2*4000) = $7500

The most extreme result is with the huge stock other option, at that point huge stock option is chosen.

E.

EVPI = EVWPI - EVWOPI

EVPI = (.3*22000 + .5*12000 + .2*6000) - 12200

EVPI = $1600