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# EMV, payoff, probabilities, labels, and decision   Question: You...

EMV, payoff, probabilities, labels, and decision

Question:

You plan to start your own cafe after graduation. You have to decide to start with a small, medium, or large shop. A consultant's report indicates a .35 probability that demand will be low and a .65 probability that demand will be high.

If you start with a small shop and demand turns out to be low, the payoff will be \$96,000; if demand turns out to be high, you can either subcontract and realize the payoff of \$96,000 or expand for a payoff of \$108,000.

You can start with a medium-size shop as a hedge: If demand turns out to be low, its payoff is estimated at \$54,000; if demand turns out to be high, you could do nothing and realize a payoff of \$98,000, or expand and realize a payoff of \$120,000.

If you start with a large shop and demand is low, the payoff will be -\$45,000, whereas high demand will result in a payoff of \$150,000.

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