Earl Shell owns his own Sno-Cone business and lives 30 miles from a beach resort. The sale of Sno-Cones is highly dependent upon his location and upon the weather
At the resort, he will profit $110 per day in fair weather, $20 per day in foul weather. At home, he will profit $70 in fair weather, $50 in foul weather. Assume that on any particular day, the weather service suggests a 60% chance of fair weather.
a. Construct Earl's payoff table.
b. What decision is recommended by the expected monetary value criterion?
c. What is the EVPI?
(a) The payoff table is
Profit Fair weather Foul weather
Probability = 0.6 Probability = .4
Sell at the resort 110 20
Sell at home 70 50
(b) the EMV for sell at the resort = .6(110 ) + .4(20 ) = 74; The EMV for sell at home = .6(70 ) + .3(50 ) = 62. The better value is $74, so Earl should sell at the resort.
(c) EVwPI = .6(110 ) + .4(50 ) = $86; EVPI = $86 - $74 = $12.
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