To achieve maximum profit, the owner of a new gourmet kitchenware shop wishes to determine how many days and evenings to keep the shop open. The owner arrives at four decision alternatives on the number of days and evenings per week the shop should be kept open under three different demand conditions. The various quarterly profit payoffs (in $1000s) are indicated in the table below.
Decisions
Alternative
States of Nature
s1High Demand
s2Average Demand
s3
Low Demand
d1
30
20
10d2
30
10
10d3
20
20
40d4
20
25
45?
Assume the probabilities of the three states of nature are P(s1) = .60, P(s2) = .30, and P(s3) = .1.
a.Determine the expected value of each alternative and indicate which decision alternative is the best.b.Determine the expected value with perfect information about the states of nature.c.Determine the expected value of perfect information.
What will be an ideal response?
?
| a. | 25, 22, 22, 24; d1 |
| b. | 30 |
| c. | 5 |
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