Refer to Problem 3. After consulting with various fitness facilities in his state and examining demographic data, Miles was able to estimate the following demand probabilities: P (Low) = 0.2; P (Medium) = 0.3; P (High) = 0.4; and P (No change) = 0.1.

1. What is the EV for each alternative, and which one is the best?

2. If Miles hires an expert to get additional demand information, how much is it worth?

Data from problem 3

Miles Diller, the owner of the athletic club The Muscle Toner, is planning to expand the size of the club to meet the growth in demand he anticipates. His options for expanding the facility are to do nothing, make a moderate expansion, make a large expansion, or build a second facility that€™s bigger than the current one. There could be small, moderate, high, or no growth in demand. The net profits for the various combinations of alternatives and demand scenarios are shown in the payoff matrix in Table F.19.

Table F.19

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State of Nature Decision Alternative Do nothing Moderate expansion Large expansion New facility High Demand $20,000 $70,000 No Change Medium Demand Low Demand $10,000 $30,000 $60,000 $0 $5,000 $10,000 -$20,000 -$40,000 -$20,000 -$50,000 $100,000 $160,000 $90,000 -$100,000