Decision Analysis

Conrad's Cakes specializes birthday cakes. A birthday cake costs $25 each to make and sells for a price of $35 for the next two days while it is still fresh. All cakes not sold during the first two days are discounted and are eventually sold for $15 each. Conrad's demand is assumed to be either 10, 20, 30, or 40 cakes for the two-day period with probabilities 0.10, 0.20, 0.40, and 0.30, respectively. Conrad seeks to determine how many cakes to bake every other day by choosing from the alternatives of 10, 20, 30, or 40 cakes. Which of the following statements are true with respect to the payoffs this decision problem? O If 20 cakes are baked, the payoff is constant no matter what happens. The greatest payoff for any decision always occurs when demand is the highest. None of the answers are correct. Based on the probability distribution of cake demand, it is less risky (less variable) in terms of the payoffs for Conrad to bake more than 20 cakes. A possible payoff in this problem is $300