james Lawson's Bed and Breakfast, in a small historic Mississippi town, must decide how to subdivide (remodel) the large old
home that will become its inn. There are three alternatives: Option A would modernize all baths and combine rooms, leaving the inn with four suites, each suitable for two to four adults. Option B would modernize only the second floor; the results would be six suites, four for two to four adults, two for two adults only. Option C (the status quo option) leaves all walls intact. In this case, there are eight rooms available, but only two are suitable for four adults, and four rooms will not have private baths. Below are the details of profit and demand patterns that will accompany each option: Annual Profit under Various Demand Patterns Alternatives High p Average p A (modernize all) B (modernize 2nd) C (status quo) This exercise contains only part b. b) The option with the highest expected value for James Lawson's Bed and Breakfast is ▼ B C A , with an expected value of $ nothing (round your response to the nearest whole number).
1 answer:
Answer:
The numbers are missing, so I looked for a similar question (see attached image).
- the expected value for option A (modernize everything) = (0.5 x $90,000) + (0.5 x $25,000) = $57,500
- the expected value for option B (modernize only second floor) = (0.4 x $80,000) + (0.6 x $70,000) = $74,000
- the expected value for option C (do nothing) = (0.3 x $60,000) + (0.7 x $33,000) = $41,100
The option with the highest expected value is option B (modernize only second floor).
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