Dillon DeMarco is considering opening a small Italian bakery in the nearby mall, close to the Italian section of the city. He has chosen a good location where he believes there will be interest in the bakery. However, Dillon is unsure how much interest there will be and is trying to decide whether to open a small, medium or large shop. It really depends on what the economy is like in the next year whether people are able to spend their money on his Italian delicacies. Based on the latest financial reports, there is a 20%20% probability for a strong economy, 30%30% probability for an average economy and 50%50% probability for a bad economy. The potential payoffs for a small, medium or large shop for a given year are shown in the decision table. Decision Table State of Nature Alternatives Strong Economy Average Economy Bad Economy Small Shop 20,00020,000 18,00018,000 30,00030,000 Medium Shop 45,00045,000 50,00050,000 45,00045,000 Large Shop 85,00085,000 64,00064,000 56,50056,500 Probabilities 0.200.20 0.300.30 0.500.50 EMV= small shop? $ EMV= medium shop? $ EMV= large shop? $ Calculate the Expected Monetary Values (EMV) for each alternative.

Dillon DeMarco is considering opening a small Italian bakery in the nearby mall, close to the Italian section of the city. He has chosen a good location where he believes there will be interest in the bakery. However, Dillon is unsure how much interest there will be and is trying to decide whether to open a small, medium or large shop. It really depends on what the economy is like in the next year whether people are able to spend their money on his Italian delicacies. Based on the latest financial reports, there is a 20%20% probability for a strong economy, 30%30% probability for an average economy and 50%50% probability for a bad economy. The potential payoffs for a small, medium or large shop for a given year are shown in the decision table. Decision Table State of Nature Alternatives Strong Economy Average Economy Bad Economy Small Shop 20,00020,000 18,00018,000 30,00030,000 Medium Shop 45,00045,000 50,00050,000 45,00045,000 Large Shop 85,00085,000 64,00064,000 56,50056,500 Probabilities 0.200.20 0.300.30 0.500.50 EMV= small shop? $ EMV= medium shop? $ EMV= large shop? $ Calculate the Expected Monetary Values (EMV) for each alternative.

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter6: Optimization Models With Integer Variables

Section: Chapter Questions

Problem 100P

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	State of Nature
Small Shop	20,00020,000	18,00018,000	30,00030,000
Medium Shop	45,00045,000	50,00050,000	45,00045,000
Large Shop	85,00085,000	64,00064,000	56,50056,500
Probabilities	0.200.20	0.300.30	0.500.50

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	State of Nature
Alternatives	Strong Economy	Average Economy	Bad Economy
Small Shop	20,00020,000	18,00018,000	30,00030,000
Medium Shop	45,00045,000	50,00050,000	45,00045,000
Large Shop	85,00085,000	64,00064,000	56,50056,500
Probabilities	0.200.20	0.300.30	0.500.50