A business is considering two sizes for its new warehouse: small and large. An analysis of the profits realized given two states of demand, low and high, are summarized in the table below. Figures are in tens of thousands of dollars per month

Question

Demand
Low High

Size
Large 70 105
Small 85 90



Management is considering conducting a study to determine which warehouse size is the most profitable. The outcomes of such a study are favorable (F) and unfavorable (U). The following probabilities have been established:



Use the decision tree to answer the following questions.
i) What is the optimal decision if the study is not used? Use the expected value method. (4 points)

ii) Find the expected value of perfect information. (6 points)

iii) What is the optimal decision strategy if the study is used? (8 points)

iv) Suppose the cost of the study is estimated to be $1,500. Should it be conducted? Why or why not? (5 points)

v) Find the efficiency of sample information. (5 points)