Question

In: Statistics and Probability

1. Lawson’s Department Store faces a buying decision for a seasonal product for which demand can...

1. Lawson’s Department Store faces a buying decision for a seasonal product for which demand can be high or low. The purchaser for Lawson’s can order 1, 2, or 3 lots of the product before the season begins but cannot reorder later. Profit projections (in thousands of dollars) are shown.

a) Find the optimal decision using the expected value approach.

b) Use the expected loss opportunity method to find the Expected Value of Perfect Information.

c) Conduct a graphical sensitivity analysis identifying the decisions for the different P(S1).

d) For the optimal solution, given the current probabilities of the state of nature, what would be the range of optimality (that is the range of values for its payoff where that decision alternative will still remain optimal) for its payoffs compared to the closest Expected Value.

State of Nature

Decision Alternative

High Demand (S1)

Low Demand (S2)

Order 1 lot, D1

60

50

Order 2 lots, D2

80

30

Order 3 lots, D3

100

10

P(Sj)

0.4

0.6

Solutions

Expert Solution

orchestra answered 2 years ago
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