Question: SOLVED PROBLEM A.1 Stella Yan Hua is considering the possibility of opening a small dress shop on Fairbanks Avenue, a few blocks from the uni-

SOLVED PROBLEM A.1 Stella Yan Hua is considering

SOLVED PROBLEM A.1 Stella Yan Hua is considering the possibility of opening a small dress shop on Fairbanks Avenue, a few blocks from the uni- versity. She has located a good mall that attracts students. Her options are to open a small shop, a medium-sized shop, or no shop at all. The market for a dress shop can be good, aver- age, or bad. The probabilities for these three possibilities are 2 for a good market, .5 for an average market, and .3 for a bad market. The net profit or loss for the medium-sized or small shops for the various market conditions are given in the adja- cent table. Building no shop at all yields no loss and no gain. What do you recommend? STATES OF NATURE GOOD AVERAGE BAD MARKET MARKET MARKET (5) (5) (S) 75,000 25,000 -40,000 100,000 35,000 -60,000 ALTERNATIVES Small shop Medium-sized shop No shop Probabilities 0 0 0 20 50 .30 SOLUTION The problem can be solved by computing the expected monetary value (EMV) for each alternative: EMV (Small shop) = EMV (Medium-sized shop) = EMV (No shop) =(

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