What is the expected value of perfect information

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Daily sales of bread by Savoia Pastry Shoppe follow a distribution which can be approximated to 400, 500, 600, 700, or 800 breads in a given day. It costs the bakery 75 cents to produce a loaf of bread, which sells for 135 cents. Any bread unsold at the end of the day is sold to the area jail for 25 cents per loaf. Construct the decision table of conditional payoffs. How many loaves should Sal bake each day in order to maximize contribution? a) Assume that the store did not collect any historical data and they only know that the demand is going to be one of the above given numbers. Find the optimal number of breads to produce under maximax, maximin, equally likely, and minimax regret criteria. Is there a robust alternative? Provide a short discussion. b) Assume now that historical data is available and different demand levels have different probabilities of occurring. Demand 400 500 600 700 800 Probability .20 .20 .40 .15 .05 What is the optimal number of breads to produce in this case? c) What is the Expected value of perfect information (EVPI) for this decision model? Explain how this value can help Savoia make a better decision.

Reference no: EM132291579

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