Using expected utility theory

Assignment Help Operation Management

Reference no: EM13956744

Lamarr has just been fired as the university bookstore manager for setting prices too low (only 20 percent above suggested retail). He is considering opening a competing bookstore near the campus., and he has begun an analysis of the situation. There are two possible sites under consideration. One is relatively small while the other is large. If he opens Site 1 and demand is good, he will generate a profit of $50,000. If demand is low, he will lose $10,000. If he opens at Site 2 and demand is high, he will generate a profit of $80,000, but he will lose $30,000 if demand is low. He also has decided that he will open at one of these sites. He believes that here is s 60 percent chance that demand will be high. He assigns the following utilities to the different profits:

U(50,000) = 0.72

U(80,000) = 1

U(-10,000) = 0.22

U(-30,000) = 0

Using expected utility theory, what should Mark do? Please show all work.

Reference no: EM13956744

Questions Cloud

Contrast the fed funds rate and the discount rate : Compare and contrast the Fed funds rate and the discount rate. Which do you think is more volatile? Which do you think is more active and why?

How should the relation between drugs and human life : What changes, if any, do you think we should make to U.S. drug patent laws? Explain. How should the relation between drugs and human life and health affect your views on drug industry monopoly profits? Explain. What would Adam Smith think about the “..

What is the impact on the community if they have plan : Many baby boomers are ready to retire anytime from now to the next five years. Some will close their doors and some will sell their business. How important is succession planning to them? When should they draft a plan? What's the impact on the commun..

Make sense or should all types of strikes be treated equally : Not all forms of strikes are protected by the NLRA. What types of strikes are protected and which ones are not? Does this make sense or should all types of strikes be treated equally?

Using expected utility theory : Lamarr has just been fired as the university bookstore manager for setting prices too low (only 20 percent above suggested retail). He is considering opening a competing bookstore near the campus., and he has begun an analysis of the situation. He be..

How is methods analysis linked to productivity improvement : Discuss briefly, the term ‘knowledge-based pay system. List some reasons why ‘methods analyses’ are necessary. How is methods analysis linked to productivity improvement?

Recall hearing about a past legal case-two ethical issues : You may recall hearing about a past legal case in which a woman sued McDonalds because of burns she received when hot coffee spilled in her lap. At the time, she was riding in her nephew’s sports car and they purchased the coffee at McDonalds’ drive-..

Adequate education for workplace success : Do you think the public school system provides adequate education for workplace success? What more could schools be doing to promote more financial success in their students?

Assume no backordered work at the end of the plan : Old Pueblo Engineering Contractors creates six-month "rolling" schedules, which are recomputed monthly. For competitive reasons (they would need to divulge proprietary design criteria, methods, and so on), Old Pueblo does not subcontract. Assume no b..

User Account

All Pages