You are the owner/operator of a medical electronics firm in the early stages of operation. You have just concluded a deal with an Asian manufacturer of hand-held blood glucose measuring devices bearing your brand name. You can market this receiver at a highly competitive price.
Your potential profit for various purchase levels under each of the five possible market conditions is shown in the table below.
|
POTENTIAL PROFIT TABLE Market condition categories
|
|
Quantity
|
1
|
2
|
3
|
4
|
5
|
|
10000
|
100
|
110
|
120
|
135
|
140
|
|
15000
|
90
|
120
|
140
|
155
|
170
|
|
20000
|
85
|
110
|
135
|
160
|
175
|
|
25000
|
80
|
120
|
155
|
170
|
180
|
|
30000
|
65
|
100
|
155
|
180
|
195
|
|
35000
|
50
|
100
|
160
|
190
|
210
|
|
40000
|
45
|
95
|
170
|
200
|
230
|
|
45000
|
30
|
90
|
165
|
230
|
245
|
|
50000
|
20
|
85
|
160
|
270
|
295
|
With no knowledge of the probabilities, how much would you stock? Why? If you think each scenario is equally likely what would be the best stocking policy?
In an effort to reach a decision on purchase and stocking you have obtained the following information from a compilation of reports and articles in trade journals. You classified the market in five categories from worst to best (1-5). Probabilities for having each category of market were estimated as follows:
Category 1. .10
2. .20
3. .50
4. .10
5 .10
a. Given this information, what would be the best stocking policy?
b. What is the expected value of perfect information for this situation?
c. If new information causes you to revise the probabilities for market condition 2 to .28 and market condition 5 to .02 would you change your decision? If so, how would you change it?