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Payoff Table and Calculations - White Mountain Ski Lodge

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The proprietor of the newly built White Mountain Ski and Swim Lodge has been considering
purchasing or leasing several snowmobiles for the use of guests. The owner found that
other financial obligations made it impossible to purchase the machines. Snowmobiles Incorporated (SI) will lease a machine for $20 a week, including any needed maintenance. According to SI, the usual rental charge to the guests of the lodge is $25 a week. Gasoline and
oil are extra. Snowmobiles Incorporated only leases a machine for the full season. The proprietor
of Ski and Swim, knowing that leasing an excessive number of snowmobiles might cause a net loss for the lodge, investigated the records of other resort owners. The combined
experience at several other lodges was found to be:

Number of Demanded Number of
Snowmobiles by Guests Weeks
7 10
8 25
9 45
10 20

a. Design a payoff table.
b. Compute the expected profits for leasing 7, 8, 9, and 10 snowmobiles based on the cost
of leasing of $20, the rental charge of $25, and the experience of other lodges.
c. Which alternative is the most profitable?
d. Design an opportunity loss table.
e. Find the expected opportunity losses for leasing 7, 8, 9, and 10 snowmobiles.
f. Which act would give the least expected opportunity loss?
g. Determine the expected value of perfect information.
h. Suggest a course of action to the proprietor of the Ski and Swim Lodge. Include in your
explanation the various figures, such as expected profit.

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Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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