Question

Fenton and Farrah Friendly, husband-and-wife car dealers, are soon going to open a new dealership. They have three offers: from a foreign compact car company, from a U.S. producer of full-sized cars, and from a truck company. The success of each type of dealership will depend on how much gasoline is going to be available during the next few years. The profit from each type of dealership, given the availability of gas, is shown in the following payoff table:

Gasoline Availability

Dealership

Shortage Surplus

0.7 0.3

Compact cars $25,000 $150,000

Full-sized cars -90,000 650,000

Trucks 125,000 170,000

to be done in excel

Answer 1

Expected value E

$E = \sum_{i=1}^{n}p_{i}x_{i}$

p = Probability of the outcome

x= an outcome

Expected value

	shortage	surplus
	0.7	0.3
compact car	25000	150000	62500
full-sized cars	-90000	650000	132000
trucks	125000	170000	138500

Since trucks have highest expected pay-off

Accept offer from trucks

Formula

	shortage	surplus
	0.7	0.3
compact car	25000	150000	=SUMPRODUCT(B$2:C$2,B3:C3)
full-sized cars	-90000	650000	=SUMPRODUCT(B$2:C$2,B4:C4)
trucks	125000	170000	=SUMPRODUCT(B$2:C$2,B5:C5)