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ABM084 QUIZ #3 With Answer Key

Mary is evaluating three potential grocery store locations with varying success probabilities and potential losses. After calculating expected monetary values (EMV), she determines the traffic circle is the best option. Additionally, a marketing study could enhance her decision-making, with an expected value of sample information (EVSI) calculated at $4,800.

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15 views3 pages

ABM084 QUIZ #3 With Answer Key

Mary is evaluating three potential grocery store locations with varying success probabilities and potential losses. After calculating expected monetary values (EMV), she determines the traffic circle is the best option. Additionally, a marketing study could enhance her decision-making, with an expected value of sample information (EVSI) calculated at $4,800.

Uploaded by

hudabu99
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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ABM085 EXERCISE ACTIVITY QUIZ #3

PROBLEM

Mary is considering opening a new grocery store in town. She is evaluating three sites: downtown, the
mall, and out at the busy traffic circle. Mary calculated the value of successful stores at these locations
as follows: downtown, $250,000; the mall, $300,000; the circle, $400,000. Mary calculated the losses if
unsuccessful to be $100,000 at either downtown or the mall and $200,000 at the circle. Mary figures her
chance of success to be 50% downtown, 60% at the mall, and 75% at the traffic circle.

(a) Draw a decision tree for Mary and select her best alternative.

(b) Mary has been approached by a marketing research firm that offers to study the area to determine if
another grocery store is needed. The cost of this study is $30,000. Mary believes there is a 60% chance
that the survey results will be positive (show a need for another grocery store). SRP survey results
positive, SRN survey results negative, SD success downtown, SM success at mall, SC success at circle,
SD don’t succeed downtown, and so on. For studies of this nature: P(SRP | success) = 0.7; P(SRN |
success) = 0.3; P(SRP | not success) = 0.2; and P(SRN | not success = 0.8. Calculate the revised
probabilities for success (and not success) for each location, depending on survey results.

(c) How much is the marketing research worth to Mary? Calculate the EVSI.

ANSWERS

A.

Mary should select the traffic circle location (EMV = $250,000).

b. Use Bayes’ Theorem to compute posterior probabilities.

P(SD | SRP) = 0.78; P(SD| SRP) = 0.22

P(SM | SRP) = 0.84; P(SM| SRP) = 0.16

P(SC | SRP) = 0.91; P(SC| SRP) = 0.09

P(SD | SRN) = 0.27; P(SD| SRN) = 0.73

P(SM | SRN) = 0.36; P(SM| SRN) = 0.64

P(SC | SRN) = 0.53; P(SC| SRN) = 0.47

These calculations are for the tree that follows:

EMV(2) = $171,600 – $28,600 = $143,000

EMV(3) = $226,800 – $20,800 = $206,000


EMV(4) = $336,700 – $20,700 = $316,000

EMV(no grocery – A) = –$30,000

EMV(5) = $59,400 – $94,900 = –$35,500

EMV(6) = $97,200 – $83,200 = $14,000

EMV(7) = $196,100 – $108,100 = $88,000

EMV(no grocery – B) = –$30,000

EMV(8) = $75,000

EMV(9) = $140,000

EMV(10) = $250,000

EMV(no grocery – C) = $0

EMV(A) = (best of four alternatives) = $316,000

EMV(B) = (best of four alternatives) = $88,000

EMV(C) = (best of four alternatives) = $250,000

EMV(1) = (0.6)($316,000) + (0.4)($88,000) = $224,800

EMV(D) = (best of two alternatives) = $250,000

c. EVSI = [EMV(1) + cost] – (best EMV without sample information)

= [$224,800 + $30,000] - $250,000

= $254,800 – $250,000 = $4,800.

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