Question: To boost holiday sales, Ginsberg jewelry store is advertising the following promotion: "If more than 7 inches of snow fall in the first 7 days of the year (january 1 through january 7), purchases made between Thanksgiving and Christmas are free!" Based on historical sales records as well as experience with past promotions, the store manager believes that the total holiday sales between Thanksgiving and Christmas could range anywhere between $200,000 and $400,000 but is unsure of anything more specific. Ginsberg has collected data on snowfall from December 17 to january 16 for the past several winters.
a. Construct a simulation model to assess potential refund amounts so that Ginsberg can evaluate the option of purchasing an insurance policy to cover potential losses. Be sure to account for the correlation in snowfall on consecutive days. Refer to Appendix 11.2 for instructions on how to incorporate correlation using ASP. To aid the computation of correlation in consecutive days, the data in the file ginsberg has been organized so that one column contains the snowfall amount on the day corresponding to the Day column and another column contains snowfall amount on the following day. You may safely ignore any correlation between every second day, every third day, and so on.
b. What is the probability that Ginsberg will have to refund sales?
c. What is the expected refund? Why is this a poor measure to use to assess risk?
d. What is the expected refund if snowfall exceeds 7 inches?