Question

Question 2

The manager of the greeting card section of Mazey’s department store is considering her order for a particular line of holiday cards. The cost of each box of cards is $3; each box will be sold for $5 during the holiday season. After the holidays, cards will be sold for $2 a box. The card section manager believes that all leftover cards can be sold at that price. The estimated demand during the holiday season for the line of cards, with associated probabilities, is as follows:

Demand	Probability
25	0.10
26	0.15
27	0.30
28	0.20
29	0.15
30	0.10

1. Develop the payoff table for this decision situation
2. Compute the expected value for each alternative and identify the best decision
3. Compute the expected value of the perfect information

Answer 1

a)

		Supply possibility
Demand possibility	Probability	25	26	27	28	29	30
25	0.1	50	49	48	47	46	45
26	0.15	50	52	51	50	49	48
27	0.3	50	52	54	53	52	51
28	0.2	50	52	54	56	55	54
29	0.15	50	52	54	56	58	57
30	0.1	50	52	54	56	58	60
		50	51.7	52.95	53.3	53.05	52.35

,b)

As per the expected value calculated for all the alternatives

Best decision is to order for 28 quantity as it has highest expected value of 53.3

c)

EVPI = Expected value with perfect information - Expected value without perfect information

= (50*0.1+52*0.15+54*0.3+56*0.2+58*0.15+60*0.1) - 53.3

= 1.6