Page 43 - Microsoft Word - 00 P1 IW Prelims.docx

Environmental influences

Answer

There are a range of possible outcomes (levels of demand) and a variety of
possible responses (number of salads to supply) and therefore it is useful to
construct a payoff table for parts (a)-(c)

Daily supply profit/(loss) outcome (x)

Daily
demand Probability (p) 40 salads 50 salads 60 salads 70 salads

40 salads 0.10 $80 (W1) $0 ($80) ($160)

50 salads 0.20 $80 $100 $20 ($60)

60 salads 0.40 $80 $100 $120 $40

70 salads 0.30 $80 $100 $120 $140

––––– ––––– ––––– –––––

EV = $80 $90 $80 $30 (W2)

Maximum profit $80 $100 $120 $140

Minimum profit $80 $0 ($80) ($160)

(a) Based on EVs, daily supply should be 50 salads since this yields the
highest expected value of $90.

Workings:

(W1) Profit is calculated as follows = 40 salads × $2 = $80

(W2) EV is calculated as follows = (0.10 × -$160) + (0.20 × -$60) + (0.40
× $40) + (0.30 × $140) = $30

(b) The maximax rule involves selecting the alternative that maximises the
maximum pay-off achievable. Looking at the table above, the maximum
profit achievable is $140. This will be achieved if 70 salads are supplied.

(c) The maximin rule involves selecting the alternative that maximises the
minimum pay-off achievable. Looking at the table above, the maximum
of the minimum profits achievable is $80. This will be achieved if 40
salads are supplied.

33