Construct a payoff table and determine the optimal number of hours Dun-Rite should contract for daily with its mechanics?
Assume risk neutrality.
You need to consider only two choices – contract for 40 hours or alternatively 60 hours (there is a mathematical theorem which we will discuss in class later that shows that choices in between, such as contract for 45 or 50 or 55 hours, cannot be optimal).
DemandScenario: probability Expectedpayoff
40 hours 0.4 60 hours 0.6 Decision Contract 40 hours Contract 60 hours
Dun-Rite should contract for__________________ hrs daily.
B. Dun-Rite has observed that suspension demand is correlated with the early morning weather forecast on the local TV station – perhaps the forecast influences customers deciding whether to step out to have their car serviced.
Dun-Rite has also observed that the forecast is either Sunny(FS)or Cloudy(FC) and that
Prob (FS) = 0.2 ; Prob (FC) = _____ ?
Further, Dun-Rite has observed that the combination of 40 hours demand and sunny forecast never occurs.
That is, Prob (Demand = 40 hours &FS) =0;
Required: Fill up the joint probability table and then compute the posterior probabilities of demand below: FS FC marginal (unconditional) prob. of demand Demand 40 hrs Demand 60 hrs marginal (unconditional) prob. of forecast
Posterior probabilities:
Pr (40 | FS) =______________________________ Pr (60 | FS) =______________________________
Pr (40 | FC) =______________________________ Pr (60 | FC) =______________________________



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