c) Maximin

The minimum contribution Room A (100 seats) Room B (200 seats) Room C (300 seats) Room D (400 seats) from each decision is:

$832,000 $( 1.164.800) $(2.662,400) $(3,328,000)

Using maximin the decision would therefore change to booking room A. Minimax regret Minimax regret looks to minimize the regret of making the wrong decision. For example, if room A is booked only 100 people can attend. If 200 try to book, Envico will regret not booking room B and being able to book all 200 in. Envico would lose out on earning' $2,163.200 and only earn $832,000, therefore regret losing the difference, $1,331,200

Room size booked Demand 100 200 300

Maximum regret

100
$

200
$

300
$ 3,494,400 1,497,600 2,662,400 3,494,400

400
$ 4,160,000 2,163,200

o
1,331,200 5,824,000 5,824,000

1,996,800

o
4,492,800 4,492,800

o
4,160,000

To minimize the maximum regret, Envico should book room C with 300 places.

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Tips
A srraibO'htforward question expected values. th at InVO . Iyes pro b a bili L . 1 1ry t/leory and rhe calculation of

Notice that part (b) requires the maximum sum per annum. Don't forget to multiply the amount per concert by the number of concerts each year. (a) (i) Scenario 1 Expected demand Scenario 2
Probability
P Popular artistes Lesser known artistes Unknown artistes Demand X

= 350 rickets per concert

EV
225 105 50 380

0.45 0.30 0.25

500 350 200

Expected demand

380 tickets per concert --------------

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(ii) Payoff table showing profit (WI, W2, W3)

200 200 300 400 500 120 (57) (204) (246) Demand 350 120 225 219 177 500 120 225 360 600

Purchase level

Expected values: EV
200 300 400 500 rickets 120 X 1 rickets (57) x 0.25 + 225 x 0.75 rickets (204) x 0.25 + 219 x 0.3 + 360 tickets (246) X 0.25 -l- 1J7 x 0.3 + 600 120 154.5 176.7 261.6

x x

0.45 0.45

Scenario 1 If demand is 350 tickets on average, the ticket agent can purchase 200, 300, 400 or 500 tickets. The expected profits will be 120, 225, 219 or 177 respectively. Optimum purchase level is 300 tickets per concert. This would give an expected profit of 225 per concert. Scenario 2 The optimum purchase level is 500 tickets per concert, which will gIve an expected profit of 261.60 per concert. (b) If demand is going to be 200 tickets for a concert then the optimum purchase level would be 200 tickets and the expected profit would be 120 per concert. Similarly, if demand is going ro be 350 tickets then the best profit would be 225 and if demand is going to be 500 then the best profit would be 600. If the ticket agent has perfect information he will always make the best decision.
Expected profit Value of perfect information Annual value = LL05.90 X 60
= 120

x 0.25 -\- 225 x 0.3 + 600

0.45

= 367.50 given perfect information.

= 367.50 - 261.60
= J05.90 = 6,354

Workings
(WI) Profit per ticket at different purchase levels
Purchase leuel 200 300 400 500 Discount 20% 25% 30% 40% Profit per ticket sold 20% X 3 = 60p 25% X 3 = 75p 30% X 3 = 90p 40% X 3 = 1.20

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