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Decision Tree A wine maker must decide whether to harvest grapes now or in four weeks. Harvesting now will yield 100,000 bottles of wine, netting P 2 per bottle. If the wine maker waits for four weeks and weather turns cold (probability: 20%), the yield will be cut in half but net P 3 per bottle. If the weather does not turn cold, the yield depends on rain. With rain (probability: 50%), a full yield netting P 4 per bottle will result. Without rain, there will still be a full 100,000-bottle yield, but the net amount will be P 3 per bottle only. REQUIRED: Determine the optimal expected value. D NOW LATER (4 weeks) COLD ( NOT COLD RAIN ( NO RAIN ):

Decision Tree A wine maker must decide whether to harvest grapes now or in four weeks. Harvesting now will yield 100,000 bottles of wine, netting P 2 per bottle. If the wine maker waits for four weeks and weather turns cold (probability: 20%), the yield will be cut in half but net P 3 per bottle. If the weather does not turn cold, the yield depends on rain. With rain (probability: 50%), a full yield netting P 4 per bottle will result. Without rain, there will still be a full 100,000-bottle yield, but the net amount will be P 3 per bottle only. REQUIRED: Determine the optimal expected value. D NOW LATER (4 weeks) COLD ( NOT COLD RAIN ( NO RAIN ):

Practical Management Science
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
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Hardware departm 8. Decision Tree A wine maker must decide whether to harvest grapes now or in four weeks. Harvesting now will yield 100,000 bottles of wine, netting P 2 per bottle. If the wine maker waits for four weeks and weather turns cold (probability: 20%), the yield will be cut in half but net P 3 per bottle. If the weather does not turn cold, the yield depends on rain. With rain (probability: 50%), a full yield netting P 4 per bottle will result. Without rain, there will still be a full 100,000-bottle yield, but the net amount will be P 3 per bottle only. REQUIRED: Determine the optimal expected value. D NOW LATER (4 weeks) COLD ( ): NOT COLD Decision Alternative Stock 0 unit Stock 1 unit Stock 2 units ( RAIN ( NO RAIN ): 9. Decision (Payoff) Table ESA Dealers, Inc. is contemplating on how many units of cars to order to meet the customer demands for the month based on the following projection: ): Demand 0 unit 1 unit 2 units The profit for each unit sold is P 200,000 while the carrying cost for each unit of unsold car is P 50,000. REQUIRED: How many units of cars should ESA order and why? Probability 10% 50% 40% States of Nature (based on demand) O unit (10%) 1 unit (50%) 2 units (40%) Expected Value 10. Perfect Information Assume that ESA Dealers in No. 9 would maximize profits if the company were able to obtain additional information that can determine exactly what all potential customers intended to do for this month (i.e., ESA has perfect information). REQUIRED: A) What is the expected value with perfect information? B) What is the expected value of perfect information? What maximum amount is ESA willing to pay for the additional information?
Transcribed Image Text:Hardware departm 8. Decision Tree A wine maker must decide whether to harvest grapes now or in four weeks. Harvesting now will yield 100,000 bottles of wine, netting P 2 per bottle. If the wine maker waits for four weeks and weather turns cold (probability: 20%), the yield will be cut in half but net P 3 per bottle. If the weather does not turn cold, the yield depends on rain. With rain (probability: 50%), a full yield netting P 4 per bottle will result. Without rain, there will still be a full 100,000-bottle yield, but the net amount will be P 3 per bottle only. REQUIRED: Determine the optimal expected value. D NOW LATER (4 weeks) COLD ( ): NOT COLD Decision Alternative Stock 0 unit Stock 1 unit Stock 2 units ( RAIN ( NO RAIN ): 9. Decision (Payoff) Table ESA Dealers, Inc. is contemplating on how many units of cars to order to meet the customer demands for the month based on the following projection: ): Demand 0 unit 1 unit 2 units The profit for each unit sold is P 200,000 while the carrying cost for each unit of unsold car is P 50,000. REQUIRED: How many units of cars should ESA order and why? Probability 10% 50% 40% States of Nature (based on demand) O unit (10%) 1 unit (50%) 2 units (40%) Expected Value 10. Perfect Information Assume that ESA Dealers in No. 9 would maximize profits if the company were able to obtain additional information that can determine exactly what all potential customers intended to do for this month (i.e., ESA has perfect information). REQUIRED: A) What is the expected value with perfect information? B) What is the expected value of perfect information? What maximum amount is ESA willing to pay for the additional information?
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