A vendor at a local baseball stadium must determine whether to sell ice cream or soft drinks at today’s game. The vendor believes that the profit made will depend on the weather. The payoff table (in $) is as follows:

Based on her past experience at this time of year, the vendor estimates the probability of warm weather as 0.60.

a. Determine the optimal action based on the maximax criterion.

b. Determine the optimal action based on the maximin criterion.

c. Compute the expected monetary value (EMV) for selling soft drinks and selling ice cream.

d. Compute the expected opportunity loss (EOL) for selling soft drinks and selling ice cream.

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

f. Based on the results of (c) or (d), which would you choose to sell, soft drinks or ice cream? Why?

g. Compute the coefficient of variation for selling soft drinks and selling ice cream.

h. Compute the return-to-risk ratio (RTRR) for selling soft drinks and selling ice cream.

i. Based on (g) and (h), what would you choose to sell, soft drinks or ice cream? Why?

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

Transcribed Image Text:

ACTION Sell Soft Drinks 150 Sell Ice Cream EVENT Cool weather Warm weather 90 300 300 200