Question

Consider a firm handling concessions for a sporting event. The firm’s manager needs to know whether to stock up with coffee or cola and is formulating policies for specific weather predictions. A local agreement restricts the firm to selling only one type of beverage. The firm estimates a $1500 profit selling cola if the weather is cold and a $5000 profit selling cola if the weather is warm. The firm also estimates a $4000 profit selling coffee if it is cold and a $1000 profit selling coffee if the weather is warm. The weather forecast says that there is a 30% of a cold front; otherwise, the weather will be warm. Build a decision tree to assist with the decision. What should the firm handling concessions do?

Answer 1

Answer: Cola is more profitable over Coffee

Explanation:

E(cola) = 0.3 * 1500 + 0.7 * 5000

E(cola) = 450 + 3500

E(cola) = 3950

E(coffee) = 0.3 * 4000 + 0.7 * 1000

E(coffee) = 1200 + 700

E(coffee) = 1900

From the decision tree which is attached, and the calculations above, it would be advised that the firm should focus on Cola, since it has a higher expected revenue of $3950, compared to the expected revenue of $1900 for coffee.

See the attached image for the decision tree