Question

A newspaper distributor assigns probabilities to the demand for a magazine as follows:
Copies demanded 1 2 3 4
Probability 0.4 0.3 0.2 0.1
A copy of the magazine sells for Rs. 7, costs Rs. 6. What can be the maximum possible
expected monetary value (EMV) if the distributor can return unsold copies for Rs. 5 each?​

Answer 1

Expected monetary value (EMV)  = 1.2    when Stock = 2

Step-by-step explanation:

Distributor will earn profit rs 1 on sell  &  Rs 1 loss on not selling

S = in Stocks

D = demand

Conditional Profit =      1 * S     if D ≥ S

                                      1 *D  - 1* (S - D) = 2D - S    if D < S

D   Probability       Profit as per Stock            Expected Profit  as Per Stock

                           1         2        3         4             1         2        3         4

1        0.4             1         0        -1         -2          0.4      0       -0.4      -0.8

2       0.3             1         2        1          0           0.3      0.6     0.3       0

3       0.2             1          2       3         2            0.2     0.4     0.6      0.4

4       0.1              1          2       3          4           0.1       0.2    0.3       0.4

                                               EMV                   1         1.2      0.8      0

expected monetary value (EMV)  = 1.2   when Stock = 2

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