Question

3. Earl Shell owns his own Sno-Cone business and lives 30 miles from a beach resort. The sale of Sno-Cones is highly dependent upon his location and upon the weather. At the resort, he will profit $120 per day in fair weather, $10 per day in bad weather. At home, he will profit $70 in fair weather, $55 in bad weather. Assume that on any particular day, the weather service suggests a 40% chance of foul weather. (1) Construct Earl's decision tree. (2) What decision is recommended by the expected value criterion

Answer 1

1) Earl has two options:

sell at the beach

good weather results in $120 profit (60% chance = $72)

bad weather results in $10 profit (40% chance = $4)

sell at home

good weather results in $70 profit (60% chance = $42)

bad weather results in $40 profit (40% chance = $16)

the expected value of selling at the beach = $76

the expected value of selling at home = $58

2) Earl should go to the beach.