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The following payoff table provides profits based on various possible decision alternatives and various levels of…
The following payoff table provides profits based on various possible decision alternatives and various levels of demand at Amber Gardner’s software firm:
| Demand Level | |||
| 0.3 | 0.7 | ||
| Low | High | ||
| Alternative | A | $10,000 | $30,000 |
| B | $5,000 | $40,000 | |
| C | ($2,000) | $50,000 | |
| *Profits in $ thousands | |||
a. Plot the expected-value lines on a graph. (Answered below)
| Alternative | Demand Level | ||
| 0 | 1 | ||
| A | $ 10,000.00 | $ 30,000.00 | |
| B | $ 5,000.00 | $ 40,000.00 | |
| C | $ (2,000.00) | $ 50,000.00 | |
b. Is there any alternative that would never be appropriate in terms of maximizing expected profit? Explain on the basis of your graph. (see graph in part a)
c. For what range of P(High Demand) would alternative A be the best choice if the goal is to maximize expected profit?
d. For what range of P(High Demand) would alternative B be the best choice if the goal is to maximize expected profit?
e. Compute the expected values for each alternative if the probability of low demand level is 0.30. Which of the the options is best under this probability?
f. Using the probability of low demand as 0.3 (therefore probability of high demand = 0.7), compute the EVPI. Explain the significance of this number (i.e. what does it mean?).