4. Fenton and Farrah Friendly, husband-and-wife car dealers, are soon going to open a new dealership. They have three offers: from a foreign compact car company, from a U.S. – producer of full-sized cars, and from a truck company. The success of each type of dealership will depend on how much gasoline is going to be available during the next few years. The profit from each type of dealership, given the availability of gas, is shown in the following payoff table:
Dealership Shortage Surplus
Compact cars $300,000 $150,000
Full-sized cars 100,000 600,000
Trucks 120,000 170,000
a. Determine which type of dealership the couple should purchase using the expected value criterion.
b. Determine the expected value of perfect information.
This solution explains the type of dealership the couple should purchase using the expected value criterion.