Question

Dillon DeMarco is considering opening a small Italian bakery in the nearby mall, close to the Italian section of the city. He has chosen a good location where he believes there will be interest in the bakery. However, Dillon is unsure how much interest there will be and is trying to decide whether to open a small, medium or large shop. It really depends on what the economy is like in the next year whether people are able to spend their money on his Italian delicacies. Based on the latest financial reports, there is a 20% probability for a strong economy, 30% probability for an average economy and 50% probability for a bad economy. The potential payoffs for a small, medium or large shop for a given year are shown in the decision table.

Decision Table

	State of Nature
Alternatives	Strong Economy	Average Economy	Bad Economy
Small Shop	20,000	18,000	30,000
Medium Shop	45,000	50,000	45,000
Large Shop	85,000	64,000	56,500
Probabilities	0.20	0.30	0.50

Calculate the Expected Monetary Values (EMV) for each alternative.

small shop EMV:

Medium shop EMV:

Large shop EMV:

Answer 1