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Q: probability ( Answered 5 out of 5 stars,   0 Comments )
Subject: probability
Category: Business and Money > Economics
Asked by: rhemaword-ga
List Price: $50.00
Posted: 22 Nov 2005 11:48 PST
Expires: 22 Dec 2005 11:48 PST
Question ID: 596342
I need help because my summary was not credible. Thanks!

Jimmy Jam's is considering selling juices along with its other products.

                         High Sales        Med. Sales          Low Sales
                            A (0.2)         B (0.5)              C (0.3)
A1 (sell juices)            3000             2000                -6000
A2 (don't sell juices)      0                0                    0

The probabilities above represent the states of nature and my degree
of uncertainties and personal judgment on the occurence of each state.
What is the expected payoff for actions A1 and A2 above? What should
my recommendation be? How can I interpret these results based on
practical considerations?
Subject: Re: probability
Answered By: leapinglizard-ga on 22 Nov 2005 13:30 PST
Rated:5 out of 5 stars
Dear rhemaword,

The expected payoff for action A1 is

  .2*3000 + .5*2000 + .3*-6000  =  600 + 1000 - 1800
                                =  -200.
For action A2, we have          

  .2*0 + .5*0 + .3*0  =  0.

You should therefore recommend action A2, not selling juices. The expected
outcome of 0 is better than the -200 expected payoff from selling juices.

The practical consideration here is that low sales are not sufficient to
pay for the overhead costs of running a business. Even though the sale
of each drink may be profitable in the sense that the sale price exceeds
the cost of the juice, cup, napkin, and labor, the overall profit from
selling drinks must be enough to pay for rent, electricity, interest,
and other fixed costs. So if there is a high enough probability that
sales will be low, the business will likely be unprofitable.


rhemaword-ga rated this answer:5 out of 5 stars
Thank you!

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