Question

Leah Johnson, director of Urgent Care of Brookline, wants to increase capacity to provide low-cost flu shots but must decide whether to do so by hiring another full-time nurse or by using part-time nurses. The table below shows the expected costs of the two options for three possible demand levels: STATES OF NATURE ALTERNATIVES LOW DEMAND MEDIUM DEMAND HIGH DEMAND $500 $300 $ 700 Hire full-time 0 $350 $1,000 Hire part-time 2 .5 3 Probabilities Using expected value, what should Ms. Johnson do? a. b. Draw an appropriate decision tree showing payoffs and probabilities. Px

Answer 1

A.

Expected value of cost of Hire full time = .2*300 + .5*500 + .3*700 = $520

Expected value of cost of Hire part time = .2*0 + .5*350 + .3*1000 = $475

So, the best alternative is Hire part time , because it has lowest expected value $475.

B.

Low Demand (2) $300 Medium Demand (.5) $500 High Demand3) Hire full time $700 Low Demand (2) Hire Part time Medium Demand (,.5) ş350 High Demand3) $1000