Pizzas ‘R' Us is a national restaurant chain with close to 100 restaurants across the United States. It is continuously in the process of finding and evaluating possible locations for new restaurants. For any potential site, Pizzas ‘R' Us needs to decide the size of the restaurant to build at that site-small, medium, or large-or whether to build none. For a particular prospective site, the accounting department estimates the present value (PV) of possible annual profit, in thousands of dollars, for each size as follows:
The prior probabilities are estimated for low demand at 0.42 and for medium demand at 0.36.
1. What is the best decision if the PV of expected profits is to be maximized?
2. What is the EVPI?
Since the EVPI is large, Pizzas ‘R' Us decides to gather additional information. It has two potential market researchers, Alice Miller and Becky Anderson, both of whom it has contracted many times in the past. The company has a database of the demand levels predicted by these researchers in the past and the corresponding actual demand levels realized. The cross-tabulation of these records are as follows:
3. Alice Miller charges $12,500 for the research and Becky Anderson $48,000. With which one should the company contract for additional information? Why?
