Statistics for Management and Economics
Statistics for Management and Economics
10th Edition
ISBN: 9781285425450
Author: Gerald Keller
Publisher: Cengage Learning
Question
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Chapter 22.1, Problem 8E

a:

To determine

Calculate the EMV value.

a:

Expert Solution
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Explanation of Solution

The EMV value of a0can be calculated as follows:

EMVa0=(Payoffa0, s1×P(s1)+Payoffa0, s2×P(s2)+Payoffa0, s3×P(s3)+Payoffa0, s4×P(s4))=(0×0.25+0×0.25+0×0.25+0×0.25)=0

The value of EMV of a0 is 0.

The EMV value of a1can be calculated as follows:

EMVa1=(Payoffa1, s1×P(s1)+Payoffa1, s2×P(s2)+Payoffa1, s3×P(s3)+Payoffa1, s4×P(s4))=(3×0.25+5×0.25+5×0.25+5×0.25)=3

The value of EMV of a1 is 3.

The EMV value of a2can be calculated as follows:

EMVa2=(Payoffa2, s1×P(s1)+Payoffa2, s2×P(s2)+Payoffa2, s3×P(s3)+Payoffa2, s4×P(s4))=(6×0.25+2×0.25+10×0.25+10×0.25)=4

The value of EMV of a2 is 4.

The EMV value of a3can be calculated as follows:

EMVa3=(Payoffa3, s1×P(s1)+Payoffa3, s2×P(s2)+Payoffa3, s3×P(s3)+Payoffa3, s4×P(s4))=((9×0.25)+(1×0.25)+7×0.25+15×0.25)=3

The value of EMV of a3 is 3. Since the EMV for a2 is greater, select the a2 (Bake 2 cakes).

b:

To determine

Calculate the EOL value.

b:

Expert Solution
Check Mark

Explanation of Solution

The EOL value of a0can be calculated as follows:

EOLa0=(Payoffa0, s1×P(s1)+Payoffa0, s2×P(s2)+Payoffa0, s3×P(s3)+Payoffa0, s4×P(s4))=(0×0.25+5×0.25+10×0.25+15×0.25)=7.5

The value of EOL of a0 is 7.5.

The EOL value of a1can be calculated as follows:

EOLa1=(Payoffa1, s1×P(s1)+Payoffa1, s2×P(s2)+Payoffa1, s3×P(s3)+Payoffa1, s4×P(s4))=(3×0.25+0×0.25+5×0.25+10×0.25)=4.5

The value of EOL of a1 is 4.5.

The EOL value of a2can be calculated as follows:

EOLa2=(Payoffa2, s1×P(s1)+Payoffa2, s2×P(s2)+Payoffa2, s3×P(s3)+Payoffa2, s4×P(s4))=(6×0.25+3×0.25+0×0.25+5×0.25)=3.5

The value of EOL of a2 is 3.5.

The EOL value of a3can be calculated as follows:

EOLa3=(Payoffa3, s1×P(s1)+Payoffa3, s2×P(s2)+Payoffa3, s3×P(s3)+Payoffa3, s4×P(s4))=((9×0.25)+(6×0.25)+3×0.25+0×0.25)=4.5

The value of EMV of a3 is 4.5. Since the EMV for a2 is greater, select the a2 (Bake 2 cakes).

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