Category: Business and Money > Economics
Asked by: rhemaword-ga
List Price: $50.00
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?
Answered By: leapinglizard-ga on 22 Nov 2005 13:30 PST
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. Regards, leapinglizard
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