Question

Question 6 a) Zarif is opening another branch of his Deli Kiosk at RnR Tapah in the North-South Expressway. Zarif can run the kiosk either for 24 hours per day or only 12 hours per day. He also considers hiring a sales experts to predict the potential demand for the new branch. If the survey were conducted, the results would show either high demand or low demand for the kiosk. Zarif has also done some analysis on the potential return of the kiosk operation. If he runs 24 hours per day, the expected return is RM 90,000 if the market is favorable, but he will lose RM 45,000 if the market is unfavorable. If he runs for 12 hours, the estimated profit will be RM 50,000 in a favorable market, and RM 20,000 loss in an unfavorable market. Currently, he assumes the probability that the market is favorable is 50%. The sales expert will charge him RM 8,000 for the survey. It is estimated that there is a 0.6 probability that the survey will indicate high demand. Furthermore, there is a 0.7 probability that the market will be favorable given a high demand from the survey. However, the sales expert warns him that there is only 38% chance of favorable market if the survey shows low demand. i) Construct a decision tree for Zarif. Analyze the tree and determine the best decision for him. (13 marks) Calculate the worth of the sales expert's advice. (2 marks) ii) Materace mento

Answer 1

Favourable (0.5) RM 90000 Unfavourable (0.5) RM 45000 24 hrs A Favourable (0.5) 12 hrs RM 50000 D Not hiring Expert Unfavourable (0.5) - RM 20000 Favourable (0.7) RM 90000 Unfavourable (0.3) - RM 45000 24 hrs E RM 8000 Hiring Expert Favourable (0.7) 12 hrs High Demand (0.6) RM 50000 B H Unfavourable (0.3) - RM 20000 Favourable (0.38) RM 90000 Low Demand (0.4) - Unfavourable (0.62) - RM 45000 24 hrs F Favourable (0.38) 12 hrs RM 50000 J Unfavourable (0.62) - RM 20000

Calculating Expected Monetary Value of not hiring expert:

Total EMV = EMV for 24 hours + EMV for 12 hours

EMV for 24 hours = 90000*0.5+ (-45000)*0.5 = 22500

EMV for 12 hours = 50000*0.5+ (-20000)*0.5 = 15000

As the maximum EMV is that of 24 hours, Decision at Node A: Zarif should open for 24 hours if he is not hiring expert and EMV for this is 22500

Calculating the Expected Monetary Value of Hiring Expert:

EMV at node G = 90000*0.7+ (-45000)*0.3 = 49500

EMV at node H = 50000*0.7+ (-20000)*0.3 = 29000

EMV at node E = 49500

EMV at node I = 90000*0.38+ (-45000)*0.62 = 6300

EMV at node J = 50000*0.38+ (-20000)*0.62 = 6600

EMV at node F = 6600

EMV at node B = 0.6*EMV at node E+0.4*EMV at node F- Charge by expert = 0.6*49500+0.4*6600-8000 = 24340

The final decision:

EMV from Node A = 22500

EMV from Node B = 24340

The final decision is Zarif should hire the expert and open for 24 hours if the demand is high and open for 12 hours if the demand is low.

ii. The worth of sales expert's advise = 24340