Chapter 20, Problem 36PS

A supermarket chain purchases large quantities of white bread for sale during a week. The stores purchase the bread for $\text{\$0}\text{.75}$ per loaf and sell it for $\text{\$1}\text{.10}$ per loaf. Any loaves not sold by the end of the week can be sold to a local thrift shop for $\text{\$0}\text{.40}$ . Based on past demand, the probability of various levels of demand is as follows:

a. Construct a payoff table, indicating the events and alternative courses of action.

b. Construct a decision tree.

c. Compute the expected monetary value (EMV) for purchasing 6,000, 8,000, 10,000, and 12,000 loaves.

d. Compute the expected opportunity loss (EOL) for purchasing 6,000, 8,000, 10,000, and 12,000 loaves.

e. Explain the meaning of the expected value of perfect information (EVPI) in this problem.

f. Based on the results of (c) or ((1), how many loaves would you purchase? Why?

g. Compute the coef�cient of variation for each purchase level.

h. Compute the return-to-risk ratio (RTRR) for each purchase level.

i. Based on (g) and (h), what action would you choose? Why?

j. Compare the results of (f) and (i) and explain any differences.

k. Suppose that new information changes the probabilities associated with the demand level. Use the following probabilities to repeat (c) through (j):