Description of decision theory

Reference no: EM1399033

The Loebuck Company must decide how many cases of milk to stock each week to meet demand. The probability distribution of demand during a week is shown in the following table. Each case costs the grocer $10 and sells for $12. Unsold cases are sold to a local farmer ( who mixes the milk with feed from livestock) for $2 per case. if there is a shortage, the grocer considers the cost of customer ill will and lost profit to be $4 per case. The grocer must decide how many cases of milk to order each week.

Demand cases Probability

15 .20

16 .25

17 .40

18 .15

1.00

A. Construct the payoff table for this decision situation.

B. Compute the expected value of each alternative amount of milk that could be stocked, and select the best decision.

C. Construct the opportunity loss table and determine the best decision.

D. Compute the expected value of perfect information.

Reference no: EM1399033

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