During the summer, a ski shop in Zurich must determine how large its order for skis...

 

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During the summer, a ski shop in Zurich must determine how large its order for skis must be for the coming winter season. The shop manager can make a small, medium, or large order for skis. The demand for skis and subsequent sales will be a result of the amount of snowfall at the nearby mountain lodges. The following payoffs table shows the sales for varying amounts of snowfall and order sizes. Order Size Light Snowfall Heavy Snowfall Small $4,000 $7,200 Medium $2,400 $10,500 Large -$1,600 $12,000 (a) If the ski shop wants to be conservative about the snowfall condition, which order size should the shop order? Justify. (3 points) The ski shop consulted the weather network forecast for the snowfall of next winter season. The weather network estimates 30% chance of light snowfall 70% chance of heavy snowfall (This information applies to part (b) and (c) below). (b) Using the Expected Payoff (EP) criterion, which order size should the shop order? Show your work. (3 points) (c) What is the maximum amount the ski shop is willing to pay for perfect information about the snowfall of next winter season (ie. EVPI)? Show your work. (3 points) During the summer, a ski shop in Zurich must determine how large its order for skis must be for the coming winter season. The shop manager can make a small, medium, or large order for skis. The demand for skis and subsequent sales will be a result of the amount of snowfall at the nearby mountain lodges. The following payoffs table shows the sales for varying amounts of snowfall and order sizes. Order Size Light Snowfall Heavy Snowfall Small $4,000 $7,200 Medium $2,400 $10,500 Large -$1,600 $12,000 (a) If the ski shop wants to be conservative about the snowfall condition, which order size should the shop order? Justify. (3 points) The ski shop consulted the weather network forecast for the snowfall of next winter season. The weather network estimates 30% chance of light snowfall 70% chance of heavy snowfall (This information applies to part (b) and (c) below). (b) Using the Expected Payoff (EP) criterion, which order size should the shop order? Show your work. (3 points) (c) What is the maximum amount the ski shop is willing to pay for perfect information about the snowfall of next winter season (ie. EVPI)? Show your work. (3 points)

Answer rating: 100% (QA)

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