An Appliance Dealer Must Decide How Many (If Any)new Microwave

question 38

Essay

An appliance dealer must decide how many (if any)new microwave ovens to order for next month.The ovens cost $220 and sell for $300.Because the oven company is coming out with a new product line in two months,any ovens not sold next month will have to be sold at the dealer's half price clearance sale.Additionally,the appliance dealer feels he suffers a loss of $25 for every oven demanded when he is out of stock.On the basis of past months' sales data,the dealer estimates the probabilities of monthly demand (D)for 0,1,2,or 3 ovens to be .3,.4,.2,and .1,respectively.
The dealer is considering conducting a telephone survey on the customers' attitudes towards microwave ovens.The results of the survey will either be favorable (F),unfavorable (U)or no opinion (N).The dealer's probability estimates for the survey results based on the number of units demanded are:
P(F | D = 0)= .1
P(F | D = 2).3
P(U | D = 0)= .8
P(U | D = 2)= .1
P(F | D = 1)= .2
P(F | D = 3).9
P(U | D = 1)= .3
P(U | D = 3)= .1
a.What is the dealer's optimal decision without conducting the survey?
b.What is the EVPI?
c.Based on the survey results what is the optimal decision strategy for the dealer?
d.What is the maximum amount he should pay for this survey?

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Definitions:

Net Exports

The value of a country's total exports minus the value of its total imports, reflecting the balance of trade.

Exchange Rates

The worth of a single currency when converted into another, showing the amount of one currency that can be swapped for a different one.

Purchasing-Power Parity

A theory in economics that compares different countries' currencies through a "basket of goods" approach to assess whether it's undervalued or overvalued.

Real Exchange Rate

A measure of the value of one currency against another, adjusted for inflation differences between the two countries.