A bakery must decide how many pies to prepare for the upcom

. A bakery must decide how many pies to prepare for the upcoming weekend. The bakery has the option to make 50, 100, or 150 pies. Assume that demand for the pies can be 50, 100, or 150. Each pie costs $5 to make and sells for $7. Unsold pies are donated to a nearby charity center. Assume that there is no opportunity cost for lost sales. Given the probability information regarding demand for the pies: P(50) = 0.3, P(100) = 0.5, and P(150) = 0.2, which alternative should be chosen using the expected monetary value (EMV) criterion?

Solution

EMV criterion will be

7*50 - 5*50 = 100 * 0.30 = 30

100*7 - 5*100 = 200 * 0.50 = 100

150*7 - 5 *150 = 300 * 0.20 = 60

the best alternative will be 100 pies