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Blossom's Flowers purchases roses for sale for Valentine's Day

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Blossom's Flowers purchases roses for sale for Valentine's Day. The roses are purchased for $10 a dozen and are sold for $20 a dozen. Any roses not sold on Valentine's Daycan be sold for $5 per dozen. The owner will purchase 1 of 3 amounts of roses: 100, 200 or 400 dozen roses. Given 0.2, 0.4 and 0.4 are the probabilities for the sale of 100, 200 or 400 dozen roses, respectively, then the EVPI for buying roses is

A. $700
B. $1,500
C. $1,900
D. $2,600

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Solution Summary

The expert examines Blossom's Flowers purchases rose for sales for Valentine's Day.

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Hello!
The correct answer is A: $700.

The EVPI (expected value of perfect information) is calculated as:

Expected value with perfect information
minus
Expected value without perfect information

Let's calculate the Expected value with perfect information. In this case, Blossom would know in advance how many dozen roses it will sell. If it knows it will sell 100, then the best choice is to buy 100 dozen roses. Total profit would be 100*20 - 100*10 = ...

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