Dexter's Shell owns his own Waffle-Cone business and lives 50 kms from a beach resort. The sale of Waffle-Cones is highly dependent upon his location and upon the weather. At the resort, he will profit $180 per day in fair weather, $40 per day in foul weather. At home, he will profit $110 in fair weather, $70 in foul weather. Assume that on any particular day, the weather service suggests a 40% chance of fair weather.
a. Construct Dexter's payoff table.
b. What decision is recommended by the expected value criterion?
c. What is the EVPI?

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Aulani Keehu · Accepted Answer

Final Answer :  (a) The payoff table is  Profit   Fair weather   Foul weather   Probability  = 0.4  Probability  = . 6  Sell at the resort  180 40  Sell at home  110 70 \begin{array} { | l | l | l | } \hline 	ext { Profit }  &  	ext { Fair weather }  &  	ext { Foul weather } \\hline  &  	ext { Probability } = 0.4  &  	ext { Probability } = .6 \\hline 	ext { Sell at the resort }  &  180  &  40 \\hline 	ext { Sell at home }  &  110  &  70 \\hline\end{array}  Profit   Sell at the resort   Sell at home  ​  Fair weather   Probability  = 0.4 180 110 ​  Foul weather   Probability  = .6 40 70 ​ ​   (b) the EMV for sell at the resort = .4 ∗ 180 + .6 ∗ 40 = 96; The EMV for sell at home = .4 ∗ 110 + .6 ∗ 70 = 86. The better value is $96, so Earl should sell at the resort.(c) EVwPI = .4 ∗ 180 + .6 ∗ 70 = $116; EVPI = $116 - $96 = $20.

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