Question

An athletic equipment store offers an annual clearance sale every May. The store sells all the accumulated overstocked and discontinued items that have been stored in a warehouse for the last 12 months. Because there is so much inventory, the sale is usually held in the store's parking lot; however, it has rained several times during the event in the past, and the store's owner is considering changing event location this year. The table below shows four alternatives and their costs. The probability for a rainy or sunny day is shown, and the estimated revenue for each location and each type of weather are also provided.

Alternative (Cost)	Rainy	Sunny
Stay in parking lot ($500)	$5,000	$20,000
Hold event inside store ($800)	$11,000	$18,000
Hold event inside warehouse ($1,200)	$10,000	$16,000
Hold event inside rented space near the store ($1,500)	$12,000	$17,000
Probability	0.70	0.30

If the expected value for each option is calculated, which alternative should the store owner select?

A. Hold the event inside the rented space near the store

B. Hold event inside the store

C. Hold event inside warehouse

D. Stay in parking lot

Answer 1

Expected value for Stay in parking lot =

= $5000*0.70 + $20000*0.30

= $9500

Expected value for Hold event inside store =

= $11000*0.70 + $18000*0.30

= $13100

Expected value for Hold event inside warehouse =

= $10000*0.70 + $16000*0.30

= $11800

Expected value for Hold event inside rented space near the store =

= $12000*0.70 + $17000*0.30

= $13500

We can see that the expected value is maximum for "Hold the event inside the rented space near the store"

Therefore, answer is A. Hold the event inside the rented space near the store