Question

1. An ice cream vendor at Roger's Centre must decide whether to sell Soft Drinks or sell Ice Cream. Her payoffs depend on the weather. Evaluate her decision using MAXIMAX, MAXIMIN, EMV and RTR Ratios Sell Soft Drinks Cool Weather Warm Weather Probability 0.4 0.6 Sell Ice Cream 30 90 60 a. Which action should you take based on the optimistic MAXIMAX criterion? b. Which action should you take based on the pessimistic MAXIMIN criterion? The Expected Monetary Value Criterion C. The action "Sell Ice Cream" has an EMV = dollars d. The action "Sell Soft Drinks" has an EMV = __ dollars e. Your best action has EMV = _ The Value of Perfect Information f. The weather lady can predict the temperature with 100% accuracy. On the 60% of days when you KNOW the weather will be warm you will opt to sell ice cream and uw = g. On the 40% of days when you KNOW the weather will be cool you will earn uc= h. i. Your EMV with perfect information is equal to The maximum amount you would pay for the advice of the weather lady is equal to The Reward to Risk Ratio j. The risk of an activity is measured by the standard deviation. The standard deviation for ice cream is equal to k. And the RTR Ratio is u/ o = 1. The RTR Ratio for Soft Drinks is equal to times

Answer 1

1.

A.

Under maximax criteria,

Maximum payoff with sell soft drink = $60

Maximum payoff with sell ice cream = $90

Since the highest of the above payoffs is $90, so sell ice cream should be sold under maximax criteria.

B.

Under maximin criteria,

Minimum payoff with sell soft drink = $50

Minimum payoff with sell ice cream = $30

Since the highest of the above payoffs is $50, so Sell soft drink should be sold under maximin criteria.

C.

sell ice cream has EMV = .4*30 + .6*90 = $66

D

sell soft drink has EMV = .4*50 + .6*60 = $56

E.

Best action = sell ice cream

Best action has EMV = $66

F.

$\mu$w = .6*90 = $54

G.

$\mu$c = .4*50 = $20

H.

EMV with perfect information = 54+20

EMV with perfect information = $74

I.

Maximum amount for the advice on weather = EMV with perfect information - EMV without perfect information

Maximum amount for the advice on weather = 74 - 66

Maximum amount for the advice on weather = $8

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